Question

Compute the PI statistic for Project Z if the appropriate cost of capital is 6 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project Z Time: 0 1 2 3 4 5 Cash flow: −$2,500 $650 $780 $950 $600 $400

Answer 1

Answer :

PV of cash inflow = $650 / ( 1 + 0.06 )^1 + $780 / ( 1 + 0.06 )^2 + $950 / ( 1 + 0.06 )^3 + $600 / ( 1 + 0.06 )^4 + $400 / ( 1 + 0.06 )^5

PV of cash inflow = $650 / ( 1.06 )^1 + $780 / ( 1.06 )^2 + $950 / ( 1.06 )^3 + $600 / ( 1.06 )^4 + $400 / ( 1.06 )^5

PV of cash inflow = $613.21 + $694.19 + $797.64 + $475.26 + $298.90

PV of cash inflow = 2,879.20

PI = PV of cash inflow / Initial investment

PI = 2,879.20 / 2,500

PI = 1.15

The project should be accepted as PI is greater than one.