Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?
A)yes;because the PI is 1.008.
B)yes;because the PI is .992.
C)yes;because the PI is .999.
D)no;because the PI is 1.008.
E)no;because the PI is .992.

Question

Based on the profitability index (PI)rule,should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not? 
A)yes;because the PI is 1.008. 
B)yes;because the PI is .992. 
C)yes;because the PI is .999. 
D)no;because the PI is 1.008. 
E)no;because the PI is .992.

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of the future cash flows divided by the initial investment. In this case, the initial investment is -$10,000 (a negative number because it represents an outflow of cash), and the future cash flows are $2,000 in year 1, $2,500 in year 2, $3,000 in year 3, and $8,000 in year 4. Using a discount rate of 8%, the present value of these cash flows is $14,961.39. So, the PI is 1.496139, which is less than 1. This means that the project is not generating a return that is greater than the cost of capital, so it should not be accepted. Therefore, the best choice is E, no; because the PI is .992.

Based on the Profitability Index (PI)rule,should a Project with the Following