Today, Northwest Agricultural is investing $29,800 in a “pears” project with a cost of capital of 8.3%. The pears project will produce cash flows of $9,600 and $10,900, over the next two years, respectively. During its final two years, the pears project will produce cash flows of $14,000 and $8,500, respectively. What is the profitability index of the 4-year pears project? a. 1.088 b. 1.187 c. .989 d. .843 e. 1.335
Today, Northwest Agricultural is investing $29,800 in a “pears” project with a cost of capital of 8.3%. The pears project will produce cash flows of $9,600 and $10,900, over the next two years, respectively. During its final two years, the pears project will produce cash flows of $14,000 and $8,500, respectively. What is the profitability index of the 4-year pears project? a. 1.088 b. 1.187 c. .989 d. .843 e. 1.335
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 22E
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Question
Today, Northwest Agricultural is investing $29,800 in a “pears” project with a cost of capital of 8.3%. The pears project will produce cash flows of $9,600 and $10,900, over the next two years, respectively. During its final two years, the pears project will produce cash flows of $14,000 and $8,500, respectively. What is the profitability index of the 4-year pears project?
a. 1.088
b. 1.187
c. .989
d. .843
e. 1.335
Expert Solution
Profitability Index
Profitability index is a measure of capital budgeting decision which aims to analyze whether the project should be accepted or not. If profitability index is more than 1, then it implies a positive net present value and hence, project should be accepted.
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