Question

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 of net investment required to generate those returns.

Consider the case of Blue Moose Home Builders:

Blue Moose Home Builders is considering investing $400,000 in a project that is expected to generate the following net cash flows:

Year Cash Flow

Year 1 $300,000

Year 2 $450,000

Year 3 $450,000

Year 4 $400,000

Blue Mooseuses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project’s PI (rounded to four decimal places): a.2.7939

b.3.6157

c,3.1226

d.3.2870

Blue Moose’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____________(**accept/reject)** the project.

By comparison, the net present value (NPV) of this project
is__________ (**$731,854,$914,817, -$514,817,
$1,006,299,$1,097,780,$869,076)**. On the basis of this
evaluation criterion, Blue Moose should
_____________**(invest/not invest)** in the project
because the project _____________**(will/will not)**
increase the firm’s value.

When a project has a PI greater than 1.00, it will exhibit an
NPV __________(**greater than 0, equal to 0, less than
0**); when it has a PI of 1.00, it will have an NPV equal to
$0. Projects with PIs___________**(greater than, equal to,
less than**)1.00 will exhibit negative NPVs.

Answer #1

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...

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...

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...

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...

1. 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 Happy Dog Soap Company 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
$375,000
Year 2
$400,000...

Suppose Celestial Crane Cosmetics is evaluating a
Suppose Celestial Crane Cosmetics is evaluating a proposed
capital budgeting project (project Alpha) that will require an
initial investment of $500,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$350,000
Year 2
$450,000
Year 3
$450,000
Year 4
$450,000
Celestial Crane Cosmetics’s weighted average cost of capital is
10%, and project Alpha has the same risk as the firm’s average
project. Based on the cash...

Suppose Cute Camel Woodcraft Company is evaluating a proposed
capital budgeting project (project Alpha) that will require an
initial investment of $450,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$375,000
Year 2
$475,000
Year 3
$400,000
Year 4
$500,000
Cute Camel Woodcraft Company’s weighted average cost of capital
is 10%, and project Alpha has the same risk as the firm’s average
project. Based on the cash flows, what is project Alpha’s...

1. 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 Black Sheep Broadcasting Company is evaluating a
proposed capital budgeting project (project Alpha) that will
require an initial investment of $450,000. The project is expected
to generate the following net cash flows:
Year
Cash Flow
Year 1
$275,000
Year 2
$500,000...

Suppose Happy Dog Soap Company is evaluating a proposed capital
budgeting project (project Alpha) that will require an initial
investment of $600,000. The project is expected to generate the
following net cash flows:
Year Cash Flow
Year 1 $275,000
Year 2 $450,000
Year 3 $450,000
Year 4 $475,000
1. Happy Dog Soap Company’s weighted average cost of capital is
8%, and project Alpha has the same risk as the firm’s average
project. Based on the cash flows, what is project...

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

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 36 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago