Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.
$$\begin{array} { | l | c | c | c | c | c | c | }
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000 \
\hline
\end{array}$$
Use the PI decision rule to evaluate this project; should it be accepted or rejected?
A) ?0.39 percent, reject
B) 0.39 percent, accept
C) ?38.88 percent, reject
D) 38.88 percent, accept

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively.
$$\begin{array} { | l | c | c | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000 \
\hline
\end{array}$$
Use the PI decision rule to evaluate this project; should it be accepted or rejected?
A) ?0.39 percent, reject
B) 0.39 percent, accept
C) ?38.88 percent, reject
D) 38.88 percent, accept

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. If PI > 1, the project should be accepted. Here, PI = (PV of cash inflows / 100,000) = 1.3888, which is greater than 1, so the project should be accepted.

Suppose Your Firm Is Considering Investing in a Project with the Cash