Nelson\'s Lamps is considering the acquisition of some new store fixtures. These

Question

Nelson's Lamps is considering the acquisition of some new store fixtures. These fixtures will cost $189,000 and generate the following cash flows over its 5-year life: $65,700, $69,800, $57,600, $54,200 and $11,500. Should this project be accepted based on profitability index (PI) if the required rate of return is 13.5%? Why or why not?
A. yes; because the PI is greater than 1.0
B. yes; because the PI is less than 1.0
C. no; because the PI is greater than 1.0
D. no; because the PI is equal to 1.0
E. no; because the PI is less than 1.0ot?

Explanation / Answer

yes; because the PI is greater than 1.0

Discount rate= 13.50% Year 0 1 2 3 4 5 Cash flow stream -189000 65700 69800 57600 54200 11500 Discounting factor 1 1.135 1.288225 1.462135 1.659524 1.883559 Discounted cash flows project -189000 57885.46 54183.08 39394.44 32659.97 6105.462 Sum of discounted future cashflows = 1228.41742 =NPV Discounting factor = (1 + Required rate)^(CORRESPONDING PERIOD IN YEARS) Discounted Cashflow= Cash flow stream/discounting factor PI = (NPV+inital investment)/initial inv 1.00649956

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