Suppose your firm is considering investing in a project with the cash flows show

Question

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 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively Tinet Cash flow: -$365,000 $65,000 $83,200 $140,200 $121,200 $80,400 Use the PiI decision rule to evaluate this project (00 not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected? accepted O rejected

Explanation / Answer

Present value of cash flows = 65000/ (1+12%)^1 + 83200/ (1+12%)^2 +140200/ (1+12%)^3 + 121200/ (1+12%)^4 + 80400/ (1+12%)^5 = 346800

PI Index = Present value of cash flows / Initial investment

= 346800 / 365000 = 0.95

If PI index is greater than 1 , we should accept the project and reject if less than 1

Hence we should reject the project

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