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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time:012345Cash flow:−$366,000$64,900$83,100$140,100$121,100$80,300Use the PI decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)PI: _____.__

Question
Asked Nov 20, 2019
14 views

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 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
 

Time: 0 1 2 3 4 5
Cash flow: −$366,000 $64,900 $83,100 $140,100 $121,100 $80,300


Use the PI decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

PI: _____.__

check_circle

Expert Answer

star
star
star
star
star
1 Rating
Step 1

Calculation of Profitability Index (PI):

The profitability index (PI) is 0.92.

Excel Spreadsheet:

...
help_outline

Image Transcriptionclose

A В C Year Cash Flows FVIF@ 13% PV of Cash Flows 1 $64,900 $57,433.63 $65,079.49 $97,096.33 $74,272.90 $43,583.62 $337,465.97 $366,000 1 1.1300 $83,100 $140,100 $121,100 $80,300 3 2 1.2769 4 1.4429 5 4 1.6305 6 5 1.8424 Total PV of Cash Flows 7 Initial Investment 8 Profitablity Index 0.92 9

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Capital Budgeting

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an...

A: Volatility can be described as the method to evaluate the spread of returns associated with an asset...

question_answer

Q: A corporate coupon bond of 7.0 percent is callable in five years for a call premium of one year of c...

A: A callable bond is one which can be redeemed before the maturity at a call price which is above the ...

question_answer

Q: 2c) Give an example to show that the American put can be worth more than the European put, that is, ...

A: The put option for both American and European options are as follows:

question_answer

Q: What is an infeasible portfolio?

A: Portfolio:Portfolio refers to the collection or bunch of investment tools such as:StocksMutual funds...

question_answer

Q: Angela Montery has a five-year car loan for a Jeep Wrangler at an annual interest rate of 6.9% and a...

A: Calculation of Payoff of the Loan:The payoff of the loan is $13,492.89Excel Spreadsheet:

question_answer

Q: Which of the following is the most correct answer for the beta of a portfolio of 35 stocks where the...

A: The beta of the portfolio will be between 0.84 and 1.51 is the most correct answer for the beta of a...

question_answer

Q: Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase th...

A: a.Calculate the cash flows from year 0 to 6 as follows:

question_answer

Q: Calculating Annuity Present Value An investment offers $4.600 per year for 15 years. with the first ...

A: Calculation of Value of Investment:The value of investment is $39,373.60.The value of investment at ...

question_answer

Q: The Knowles/Armitage (KA) group at Merrill Lynch advises clients on how to create a diversified inve...

A: Given that the expected return and standard deviation of the All world fund is 7.80% and 18.90% resp...