Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Sonaiya Development Group is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $475,000 Sonaiya Development Group uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI: 0.4494 0.4066 0.4708 0.4280 Sonaiya Development Group'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 NPV of this project is . On the basis of this evaluation criterion, Sonaiya Development Group should in the project because the project_ increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV
Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Sonaiya Development Group is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $475,000 Sonaiya Development Group uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI: 0.4494 0.4066 0.4708 0.4280 Sonaiya Development Group'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 NPV of this project is . On the basis of this evaluation criterion, Sonaiya Development Group should in the project because the project_ increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:6. Profitability index
Estimating the cash flow generated by $1 invested in investment
The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its
initial cash outflow.
Sonaiya Development Group is considering investing $3,225,000 in a project that is expected to generate the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$450,000
Year 3
$475,000
Year 4
$475,000
Sonaiya Development Group uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this
project's PI:
O 0.4494
O 0.4066
0.4708
O 0.4280
Sonaiya Development Group'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 NPV of this project is
On the basis of this evaluation criterion, Sonaiya Development Group should
v in the project because the project
v increase the firm's value.
A project with a negative NPV will have a PI that is
; when it has a PI of 1.0, it will have an NPV
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