a projects discounted ret urn generated by each dollar of net investment require

Question

a projects discounted ret urn generated by each dollar of net investment required to generate those returns gle Sogn Consider the case of Fuzty Badger Transport Company: Fuzzy Badger Transport Company is considering investing $400,000 in a project that is expected to generate the following net cash filows: Fuzzy Badgerses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places): Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $475,000 Year4 $400,000 3.5872 ? 3.9459 3.0491 O 3.2285 Fuzzy Badger's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the net present value (NPV) of this project is criterion, Fuzzy Badger should -On the basis of this cvaluation in the project because the project increase the firm's value When a project has a PI greater than 1.00, it will exhibit an NPV have an NPV equal to $0. Projects with Pls i when it has a PI of 1.00, it will 1.00 will exhibit negative NPVs.

Explanation / Answer

Present Value(PV) of Cash flow=(Cash flow )/((1+i)^N) i=Discount Rate=WACC=7%=0.07 N=Year of Cash flow Year wise cash flow and PV of cash flows are given below: N A B=A/(1.07^N) Year Cash Flow PV of Cash flow 1 $350,000 $            327,103 2 $475,000 $            414,883 3 $475,000 $            387,741 4 $400,000 $            305,158 SUM $        1,434,886 PV Sum of PV of Postive cash flows $ 1,434,886 I Initial Investment $400,000 PI=PV/I Profitability Index(PI) 3.58721444 PI=3.5872 Answer: 3.5872 Cased on this projects's PI,the firm should accept the project (Since the PI is greater than 1) The net present value of the project is $ 1,034,886 (1434886-400000) On the basis of this evaluation criterion, Fuzzy Badger should invest in the project because the project return increases the firm's value When a project has a PI greater than 1, it will exhibit an NPV greater than zero When it has a PI of 1.00,it will have NPV equal to $0 Projects with PI less than 1.00 will exhibit negative NPV PI=(NPV+Initial Investment)/(Initial Investment) If PI>0,(NPV+Initial investment)>(Initial Investmen) Or, NPV>0 If PI=1,(NPV+Initial investment)=(Initial Investmen) NPV=0 If PI is

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