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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 as follows if the appropriate cost of capital is 10%.

Time 0 1 2 3 4 5
Cash Flow -250 75 0 100 75 50

a) 2.41, accept

b) 0.023, reject

c) 0.90, reject

d) 1.97, accept

Solutions

Expert Solution

A project with profitability index lower than 1 should be rejected

Present value of cash flows = Future value / (1 + rate)^time

Present value of cash flows = 75 / (1 + 0.1)^1 + 0 + 100 / (1 + 0.1)^3 + 75 / (1 + 0.1)^4 + 50 / (1 + 0.1)^5

Present value of cash flows = 68.1818 + 0 + 75.13148 + 51.22601 + 31.04607

Present value of cash flows = $225.58536

Profitability index = Present value of cash flows / Initial cost

Profitability index = 225.58536 / 250

Profitability index = 0.90

c) 0.90, reject

jeff jeffy answered 2 years ago
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