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. Consider this case: Blue Moose Home Builders is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 Year 4 $500,000 $500,000 Blue Moose Home Builders uses 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) 0.5731 0.6335 0.6033 O 0.7240 Blue Moose Home Builders'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 in the project because the project A project with a negative NPV will have a PI that is . On the basis of this evaluation criterion, Blue Moose Home Builders should increase the firm's value. ; when it has a PI of 1.0, it will have an NPV
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. Consider this case: Blue Moose Home Builders is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $475,000 Year 3 Year 4 $500,000 $500,000 Blue Moose Home Builders uses 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) 0.5731 0.6335 0.6033 O 0.7240 Blue Moose Home Builders'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 in the project because the project A project with a negative NPV will have a PI that is . On the basis of this evaluation criterion, Blue Moose Home Builders should increase the firm's value. ; when it has a PI of 1.0, it will have an NPV
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...
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