Miller's is considering a 2-year expansion project that will require $398,000 up front.The project will produce cash flows of $361,000 and $114,000 for Years 1 and 2,respectively.Based on the profitability index (PI)rule,should the project be accepted if the discount rate is 12 percent? Should it be accepted if the discount rate is 17 percent?
A)Yes; Yes,because the PI is 1.2
B)Yes; No,because the PI is 0.98
C)No; Yes,because the PI is 0.98
D)No; No,because the PI is 1.2
E)Yes; Yes,because the PI is 1.19

Question

Quizplus · Accepted Answer

PI_12% = ($361,000 / 1.12 + $114,000 / 1.12²)/ $398,000 = 1.04; Accept PI_16% = ($361,000 / 1.17 + $114,000 / 1.17²)/ $398,000 = 0.98; Reject

Miller's Is Considering a 2-Year Expansion Project That Will Require