Question

In: Finance

Compute the PI statistic for Project X and note whether the firm should accept or reject...

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 8 percent.

Time: 0, 1, 2, 3, 4, 5

Cash Flow: -82, -82, 0, 117, 92, 67

Time: 0 1 2 3 4 5
Cash flow: -82 -82 0 117 92 67

Multiple Choice

  • 48.17 percent, reject

  • 8.00 percent, accept

  • 58.74 percent, accept

  • 47.21 percent, reject

All information is given in the question.

Solutions

Expert Solution

The PI statistic is calculated by dividing present value of future cash flows by initial investment. i.e

Initial cash flow = 82
Year Cash flows Present value factor Present value of cash flows
1 -$82                  0.9259 -$75.93
2 0                  0.8573 0
3      117.00                  0.7938                    92.88
4         92.00                  0.7350                    67.62
5         67.00                  0.6806                    45.60
Total                  130.17
PI                  1.5875
PI in % 58.749%
Decision Accept

Excel formulas:

jeff jeffy answered 2 years ago
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