Question

Cedar City Public Transportation is considering adding a new bus route. To do so, the entity would be required to purchase a new $ 600,000 bus, which would have a 10-year life and no salvage value. If the new bus is purchased, Cedar City Public Transportation’s managers expect net cash inflows from bus ridership would rise by $ 91,000 per year for the life of the bus. Cedar City Public Transportation uses a 9 percent required rate of return for evaluating capital projects.
a. Compute the profitability index of the bus investment. (Round to two decimal points.)
b. Should Cedar City Public Transportation buy the new bus?
c. What is the minimum acceptable value for the profitability index for an investment to be acceptable? Explain.



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  • CreatedJune 03, 2014
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