Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array} { l c c c c c c }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - \$ 1,000 & \$ 350 & \$ 380 & \$ 420 & \$ 300 & \$ 100
\end{array}$$
A) The project's PI is 8.48 percent and the project should be accepted.
B) The project's PI is 8.48 percent and the project should be rejected.
C) The project's PI is 16.48 percent and the project should be accepted.
D) The project's PI is 21.48 percent and the project should be accepted.

Question

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array} { l c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - \$ 1,000 & \$ 350 & \$ 380 & \$ 420 & \$ 300 & \$ 100
\end{array}$$
A) The project's PI is 8.48 percent and the project should be accepted.
B) The project's PI is 8.48 percent and the project should be rejected.
C) The project's PI is 16.48 percent and the project should be accepted.
D) The project's PI is 21.48 percent and the project should be accepted.

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. The present value of the cash flows at a 10% discount rate is approximately $1,214.80. Dividing this by the initial investment of $1,000 gives a PI of approximately 1.2148, or 21.48%. Since the PI is greater than 1, the project should be accepted.

Compute the PI Statistic for Project Z and Advise the Firm