A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project?
A) Accept the project because the PI is .97
B) Reject the project because the PI is .97
C) Accept the project because the PI is 1.03
D) Reject the project because the PI is 1.01
E) Reject the project because the PI is 1.03

Question

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. Given the discount rate of 15.5%, the initial cost of $109,200, and the inflows, the PI can be calculated. The correct PI calculation leads to a value less than the required $1.06 return per $1 invested, specifically a PI of .97, which does not meet the boss's requirement. Therefore, the project should be rejected.

A Project Has a Discount Rate of 15