Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
Project Z

A)The project's PI is 8.48 percent and the project should be accepted.
B)The project's PI is 8.48 percent and the project should be rejected.
C)The project's PI is 16.48 percent and the project should be accepted.
D)The project's PI is 21.48 percent and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = 214.78; Step 2: 214.78/1,000 = 21.48 percent and since PI 0 accept.

Question

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
Project Z

A)The project's PI is 8.48 percent and the project should be accepted. 
B)The project's PI is 8.48 percent and the project should be rejected. 
C)The project's PI is 16.48 percent and the project should be accepted. 
D)The project's PI is 21.48 percent and the project should be accepteD.Step 1: Find NPV using financial calculator: NPV = 214.78; Step 2: 214.78/1,000 = 21.48 percent and since PI > 0 accept.

Quizplus · Accepted Answer

To calculate the PI statistic, we divide the present value of future cash flows by the initial investment. Using a financial calculator, we find that the NPV for Project Z is $214.78. Then we divide NPV by the initial investment of $1,000 to get the PI statistic: 214.78/1,000 = 0.21478 or 21.48%. Since the PI statistic is greater than 0, we should accept the project. Therefore, the best choice is option D.

Compute the PI Statistic for Project Z and Advise the Firm