Suppose your firm is considering investing in a project with the cash flows show

Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.

Time   0   1   2   3   4   5   6
Cash Flow   -880   180   460   660   660   260   660

Use the PI decision rule to evaluate this project; should it be accepted or rejected?
137.73%, accept
-137.00%, reject
1.37%, reject
1.37%, accept

Explanation / Answer

Solution:

Note: With the given information above, the PI is 2.37, not 1.37. It has been shown in the calculation.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash Flow - 880 180 460 660 660 260 660 Preseent Value @ 9 % 1 0.917 0.842 0.772 0.708 0.650 0.596 Present Value of Cahflows 165.1376 387.1728 509.6411 467.5606 168.9822 393.5364 Total Present Value of Cahflows 2092.03 Profitability Index = 1 + NPV/Initial Investement 2.377 Decision 1.37%, It should accept the proposal

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