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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively Time Cash flow -$7,600 S1,190 $2,390 S1,590 S1,590 $1,390 $1.190 Use the PI decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Pl Should it be accepted or rejected? Rejected

Explanation / Answer

Ans PI = 0.93

Rejected Since PI is less than 1.

Year Project Cash Flows (i) DF@ 9% (ii) PV of Project A ( (i) * (ii) ) 0 -7600 1             (7,600.00) 1 1190 0.917               1,091.74 2 2390 0.842               2,011.62 3 1590 0.772               1,227.77 4 1590 0.708               1,126.40 5 1390 0.650                  903.40 6 1190 0.596                  709.56 NPV                (529.51) Profitability Index =                      0.93 Present calue of cash Inflow / Initial Investment (Cash Outflows) (7070/7600)

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