You would like to invest in the following project. $$\begin{array} { | l | l | }
\hline \text { Year } & \text { Cad Flow } \
\hline 0 & -£ 55,000 \
\hline 1 & £ 30,000 \
\hline 2 & £ 37,000 \
\hline
\end{array}$$ Victoria,your boss,insists that only projects that can return at least £1.10 in today's dollars for every £1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should:
A)accept the project because it returns almost £1.22 for every £1 invested.
B)accept the project because it has a positive PI.
C)accept the project because the NPV is £2,851.
D)reject the project because the PI is 1.05.
E)reject the project because the IRR exceeds 10% .

Question

You would like to invest in the following project. $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cad Flow } \
\hline 0 & -£ 55,000 \
\hline 1 & £ 30,000 \
\hline 2 & £ 37,000 \
\hline
\end{array}$$ Victoria,your boss,insists that only projects that can return at least £1.10 in today's dollars for every £1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should:
A)accept the project because it returns almost £1.22 for every £1 invested.
B)accept the project because it has a positive PI.
C)accept the project because the NPV is £2,851.
D)reject the project because the PI is 1.05.
E)reject the project because the IRR exceeds 10% .

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. Using a 10% discount rate, the present value of cash flows is approximately £57,750, leading to a PI of 1.05 (£57,750/£55,000), which is below the required 1.10.

You Would Like to Invest in the Following Project Victoria,your Boss,insists That Only Projects That Can Return at Least