Question

9. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability...

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 $425,000
Year 4 $475,000

Purple Whale Foodstuffs Inc. uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project’s PI (rounded to four decimal places):

0.7162

0.6228

0.5605

0.7474

Purple Whale Foodstuffs Inc.’s decision to accept or reject this project is independent of its decisions on other projects. Based on the project’s PI, the firm should ???? the project.

By comparison, the NPV of this project is ???? . On the basis of this evaluation criterion, Purple Whale Foodstuffs Inc. should ???? in the project because the project ???? increase the firm’s value.

A project with a negative NPV will have a PI that is ???? ; when it has a PI of 1.0, it will have an NPV ????? .

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
11. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability...
11. 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 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...
Profitability index Estimating the cash flow generated by $1 invested in investment The profitability index (PI)...
Profitability index Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a capital budgeting tool that provides another way to compare a project’s benefits and costs. It is computed as a ratio of the discounted value of the net cash flows expected to be generated by a project over its life (the project’s expected benefits) to its net cost (NINV). A project’s PI value can be interpreted to indicate a project’s discounted return generated...
Estimating the cash flow generated by $1 invested in investment The profitability index (PI)is a capital...
Estimating the cash flow generated by $1 invested in investment The profitability index (PI)is a capital budgeting tool that provides another way to compare a project’s benefits and costs. It is computed as a ratio of the discounted value of the net cash flows expected to be generated by a project over its life (the project’s expected benefits) to its net cost (NINV). A project’s PI value can be interpreted to indicate a project’s discounted return generated by each dollar...
The profitability index (PI) is a capital budgeting tool that is defined as the present value...
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: Free Spirit Industries Inc. is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $425,000 Year 3 $450,000 Year 4 $425,000 Free Spirit Industries Inc. uses a WACC of 7% when...
Based on the profitability index rule, should a project with the following cash flows be accepted...
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
Profitability index. Given the discount rate and the future cash flow of each project listed in...
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​%
Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $2,225,000....
Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $350,000 Year 2 –200,000 Year 3 400,000 Year 4 400,000 Cold Goose Metal Works Inc.’s WACC is 9%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR). 18.18% 20.46% 19.32% -14.33% If Cold Goose Metal Works Inc.’s managers select projects based...
Suppose Acme Manufacturing Corporation’s CFO is evaluating a project with the following cash inflows. She does...
Suppose Acme Manufacturing Corporation’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $425,000 Year 3 $475,000 Year 4 $425,000 If the project’s weighted average cost of capital (WACC) is 7%, what is its NPV? $397,786 $437,565 $417,675 $457,454 Which of the following statements indicate a disadvantage of using the...
Telesis Corp is considering a project that has the following cash flows: Year Cash Flow 0...
Telesis Corp is considering a project that has the following cash flows: Year Cash Flow 0 -$1,000 1 400 2 300 3 500 4 400 The company’s weighted average cost of capital (WACC) is 10%. What are the project’s payback period (Payback), internal rate of return (IRR), net present value (NPV), and profitability index (PI)? A. Payback = 3.5, IRR = 10.22%, NPV = $1260, PI=1.26 B. Payback = 2.6, IRR = 21.22%, NPV = $349, PI=1.35 C. Payback =...
Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV)...
Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $400,000 Year 3...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT