9. Profitability index Aa Aa Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Happy Dog Soap Company is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Happy Dog Soap Company uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places): Year Cash Flow Year 1 $300,000 Year 2 $500,000 Year 3 $425,000 Year 4 $425,000 O 0.4110 0.4727 O 0.4932 O 0.3699 Happy Dog Soap Company's decision to accept or reject this project is independent of its decisions on other projects Based on the project's PI, the firm should the project . On the basis of this evaluation criterion, Happy Dog By comparison, the NPV of this project is Soap Company should in the project because the project increase the firm's value A project with a negative NPV will have a PI that is when it has a PI of 1.0, it will have an NPV