9. Profitability Index Estimating the cash flow generated by $1. Invested in Investment The profitability Index (PD) is a capital budgeting tool that provides another way to compare a project's benefits and costs. It is computed as a ratio of the discounted value of the net cash lows expected to be generated by a project over its life (the project's expected benefits) to its net cost (NIN). A project's P1 value can be interpreted to indicate a project discounted return generated by each dottor of niet investment required to generate those returns. Consider the case of Blue Moose Home Builders: Blue Moose Home Builders is considering investing $500,000 in a project that is expected to generate the following net cash flows: Cash Flow Year Year 1 Year 2 $350,000 $475,000 $425,000 $400,000 Year 3 Year 4 Blue Moose uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places). 2.6487 2.5093 2.9275 2.7881 Blue Moose's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's Pt, the firm should the project reject rison, the net present value (NPV) of this project is accept in the project because the project On the basis of this evaluation criterion, Blue Moose should Increase the firm's value when it has a P1 of 1.00, it will have an NPV equal to $0. When a project has a PI greater than 1.00, it will exhibit an NPV Projects with PIS 1.00 will exhibit negative NPVS. Blue Moose uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places) 2.6487 2.5093 5715,257 $849,367 2.9275 $894,071 2.7881 $983,478 Blue Moose's decision to accept or reject this project is indepe-$294,071bcisions on other projects. Based on the project's P1, the firm should the project $1,072,885 By comparison, the net present value (NPV) of this project is in the project because the project On the basis of this evaluation criterion, Blue Moose should Increase the firm's value. ; when it has a PI of 1.00, it will have an NPV equal to $0. When a project has a PI greater than 1.00, it will exhibit an NPV Projects with PIS 1.00 will exhibit negative NPVs. Blue Moose'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. By comparison, the net present value (NPV) of this project is In the project because the project On the basis of this evaluation criterion, Blue Moose should increase the firm's value. when it has a PI of 1.00, it will have an NPV equal to $0. invest It has a PI greater than 1.00, it will exhibit an NPV not invest PIS v1.00 will exhibit negative NPVS. Blue Moose's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's Pl, the firm should the project. By comparison, the net present value (NPV) of this project is in the project because the project On the basis of this evaluation criterion, Blue Moose should Increase the firm's value. will not When a project has a PI greater than 1.00, it will ex pv Projects with PIS 1.00 will exhibi will NPVS when it has a PI of 1.00, it will have an NPV equal to $0. Blue Moose's decision to accept or reject this project is Independent of its decisions on other projects. Based on the project's Pl, the firm should the project. greater than $0 By comparison, the net present value (NPV) of this project is the basis of this evaluation criterion, Blue Moose should in the project because the project less than $0 value equal to $0 when it has a PI of 1.00, it will have an NPV equal to 50 When a project has a PI greater than 1.00, it will exhibit an NPV Projects with PIS 1.00 will exhibit negative NPVS. Blue Moose'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 By comparison, equal to less than value (NPV) of this project is ecause the project On the basis of this evaluation criterion, Blue Moose should increase the firm's value greater than than 1.00, it will exhibit an NPV 1.00 will exhibit negative NPVS. When a project Projects with PIS when it has a P1 of 1.00, it will have an NPV equal to so