courses.aplia.com Graded Assignment | Read Chapter 10 | Back to Assignment Due S

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courses.aplia.com Graded Assignment | Read Chapter 10 | Back to Assignment Due Saturday 12.02.17 at 11:45 PM Attempts: Keep the Highest: /7 3. Profitability index Estimating the cash flow generated by $1 invested in a project 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: Happy Dog Soap Company is considering investing $3,000,000 in a project that is expected to generate the following net cash flows: Happy Dog Soap Company uses a WACC of 9% when evaluating proposed capital budgeting projects. Based or these cash flows, determine this project's PI (rounded to four decimal places); Year 1 $300,000 Year 2 $450,000 Year 3 $450,000 Year 4 $400,000 O 0.3855 O 0.4283 O 0.5140 0.4925 ect this project is independent of its decisions on other projects. the project. Based on the project's PI, the firm should By comparison, the NPV of this project is . On the basis of this evaluation criterion, Haoo

Explanation / Answer

NPV=-3000000+300000/1.09+450000/1.09^2+450000/1.09^3+450000/1.09^4=-1679741
PI=1+NPV/Initial Investment=1-1679741/3000000=0.4283

As PI is less than 1, we should reject the project

NPV is -1679741
not accept
does not increase
less than 1
zero

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