You would like to invest in the following project. $$\begin{array} { c c }
\underline{\text { Year }} &\underline{ \text { Cash Flow }} \
0 & - \$ 55,000 \
1 & \$ 30,000 \
2 & \$37,000 \

\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} { c c } 
\underline{\text { Year }} &\underline{ \text { Cash Flow }} \
 0 & - \$ 55,000 \
1 & \$ 30,000 \
2 & \$37,000 \

\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, 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