Based on the profitability index rule, should a project with the following cash

Question

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not? Yes; The PI is 0.80. Yes; The PI is 1.08. No; The PI is 0.96. No; The PI is 0.80.Yes; The PI is 0.96. An investment has the following cash flows and a required return of 13 percent. Based on IRR, should this project be accepted? Why or why not? No; The IRR is less than the required return by about 1.53 percent. Yes; The IRR exceeds the required return by about 1.53 percent. Yes; The IRR is less than the required return by about 0.06 percent. No; The IRR exceeds the required return by about 0.06 percent. Yes; The IRR exceeds the required return by about 0.06 percent.

Explanation / Answer

1) Year Cash flow PV A 0 -32,100 -32,100 1 11,800 10,351 2 0 0 3 22,600 15,254 NPV -6,495 PV of cash flows 25,605 =(32100-6495) PI 0.80 =(25605/32100) Reject the project as the PI is less than one 1) Year Cash flow 0 -42,000 1 16,500 2 28,400 3 7,500 IRR 13.06% Required rate of return 13% C. Yes; The IRR exceeds the required return by about 0.06 percent.

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