Question

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8 percent.

Time:	0	1	2	3	4	5
Cash flow:	-82	-82	0	117	92	67

rev: 05_08_2019_QC_CS-167988

Multiple Choice

• 67.62, accept

• 1.59, accept

• 48.17, accept

• 8.00, reject

Answer 1

1.59,accept

Profitability Index =PV of Future cash flows /Initial Investment

Cost of capital =8%

Initial Investment=$-82

Year 1=-82 Year 2 =0 Year 3=$117 Year 4 =92 Year 5=67

PV of Future Cash flows

=$-82*.9259+$0*.573+$117*.7938+$92*.735+$67*.6806=$130.171

PI=PV of Future cash flows /Initial Investment

=$130.171/82=1.5874 which can be rounded to 1.59

Since the PI is greater than 1, the NPV will be positive, so the project will add value to the firm and so the project should be accepted.