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 6 percent.

Time:	0	1	2	3	4	5
Cash flow:	-79	-79	0	104	79	54

answers to choose from:

• 60.45, accept

• 6.00, reject

• 34.64, accept

• 1.44, accept

Answer 1

Ans 1.44, accept, since PI is greater than 1

Year		Project A (i)		DF@ 6% (iii)	PV of Project A ( (i) * (iii) )
1		-79		0.943	-74.53
2		0		0.890	0.00
3		104		0.840	87.32
4		79		0.792	62.58
5		54		0.747	40.35
		NPV			115.72
		Total of PV of Cash Inflows			115.72
		Cash Outflows			79
		Profitability Index =			1.44
	Present value of cash Inflow / Initial Investment (Cash Outflows)				(115.72 / 79)