Suppose your firm is considering investing in a project with the cash flows show
ID: 2793837 • Letter: S
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 statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$4,900 $1,220 $2,420 $1,620 $1,620 $1,420 $1,220 Use the PI decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) PI Should it be accepted or rejected? Rejected Accepted
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=1220/1.09+2420/1.09^2+1620/1.09^3+1620/1.09^4+1420/1.09^5+1220/1.09^6
=$7205.07
PI=Present value of inflows/Present value of outflows
=$7205.07/$4900
=1.47(Approx)
Hence since PI is greater than one;the project should be accepted.
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