Question

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 15 percent? Why or why not? (i.e. Calculate the profitability index (PI) and explain why the project should or should not be accepted.)

Year: 0,1,2,3

Cash Flow: -32100, 11,800, 0, 22,600

Answer #1

Profitability index = Present value / Initial investment

Present value = 11,800 / (1 + 0.15)^{1} + 22,600 / (1 +
0.15)^{3}

Present value = 10,260.87 + 14,859.87

Present value = 25,120.74

Profitability index = 25,120.74 / 32,100

Profitability index = 0.78

Project should NOT be accepted as it has a profitability index of less than 1. A profitability index of less than 1.0 indicate the deficit of the outflows is greater than the discounted inflows, and the project should not be accepted.

Based on the profitability index (PI) rule, should a project
with the following cash flows be accepted if the discount rate is
8%? Why Year or why not? Cash Flow $18,600 S10,000 I$7,300 I$3,700
2 yes,because the Pl is 1.008 yes; because the Pl is 0.992. yes;
because the Pl is 0.999 no; because the Pl is 1.008 no because the
Pl is 0,992

What is the profitability index of a project with the following
cash flows if the discount rate is 10 percent? Year CFs 0 -802 1
761 2 497 3 376

Calculate the profitability index for the cash flows provided in
the table below.? Note: The negative cash flow for year 0 is the
initial investment for the project. Assume a required rate of
return of? 9.00%
Year 0,1,2,3
Cash Flow -$90,000, ?$32,000, ?$32,000, ?$32,000

What is the profitability index for the following set of cash
flows if the relevant discount rate is 10 percent? What if the
discount rate is 15 percent? If it is 22 percent? Year Cash
Flow
0 -16,700
1-9,700
2 -7,800
3 - 4,300

Profitability index. Given the discount rate and the future cash
flow of each project listed in the following table, use the PI to
determine which projects the company should accept.
What is the PI of project A?
What is the PI of Project B?
Cash Flow
Project A
Project B
Year 0
−$2,000,000
−$2,300,000
Year 1
$600,000
$1,150,000
Year 2
$700,000
$1,050,000
Year 3
$800,000
$950,000
Year 4
$900,000
$850,000
Year 5
$1,000,000
$750,000
Discount rate
5%
16%

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budgeting tool that is defined as the present value of a project’s
cash inflows divided by the absolute value of its initial cash
outflow. Consider this case: Purple Whale Foodstuffs is considering
investing $3,225,000 in a project that is expected to generate the
following net cash flows: Year Cash Flow Year 1 $375,000 Year 2
$475,000 Year 3 $400,000...

9. Profitability index
Estimating the cash flow generated by $1 invested in a
project
The profitability index (PI) is a capital budgeting tool that is
defined as the present value of a project’s cash inflows divided by
the absolute value of its initial cash outflow. Consider this
case:
Purple Whale Foodstuffs Inc. is considering investing $2,225,000
in a project that is expected to generate the following net cash
flows:
Year
Cash Flow
Year 1
$350,000
Year 2
$400,000
Year 3...

You are analyzing two proposed capital investments with the
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__________________________________________
Year Total
(or net) cash flow
_________________________________________
1 $20,000
2 30,000
3 50,000
4 60,000
_________________________________________
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Estimating the cash flow generated by $1 invested in
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The profitability index (PI) is a capital budgeting tool that
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