Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inﬂows to be $40,000 annually for seven years, after
Which he plans to scrap the equipment and retire to the beaches of Jamaica.
Assume the required return is 15%. What is the project's PI? Should it be accepted?
A) 0.88; yes
B) 0.88; no
C) 1.00; indifferent
D) 1.04; yes
E) 1.04; no

Question

Quizplus · Accepted Answer

To calculate the project's PI, we need to divide the present value of the cash inflows by the initial investment.

First, we need to calculate the present value of the after-tax cash inflows. Using a financial calculator, we can find that the present value of an annuity of $40,000 per year for seven years at a discount rate of 15% is $184,505.

Next, we divide the present value of the cash inflows by the initial investment to get the project's PI:

PI = PV of cash inflows / Initial investment 
PI = $184,505 / $160,000 
PI = 1.15

The project's PI is 1.15, which means that for every dollar invested, the project generates $1.15 in present value cash inflows. Since the PI is greater than 1, the project should be accepted.

Therefore, the best choice is D: 1.04; yes.

Bill Plans to Open a Do-It-Yourself Dog Bathing Center in a Storefront