ANSWER OPTIONS IN BOLD.

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 projects cash inflows divided by the absolute value of its initial cash outflow. Consider this case:

Blue Moose Home Builders is considering investing $2,225,000 in a project that is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$350,000
Year 2	$400,000
Year 3	$425,000
Year 4	$425,000

Blue Moose Home Builders uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this projects PI (rounded to four decimal places):

0.5656

0.6222

0.6504

0.5373

Blue Moose Home Builderss decision to accept or reject this project is independent of its decisions on other projects. Based on the projects PI, the firm should: REJECT or ACCEPT the project.

By comparison, the NPV of this project is -1063315 / -966650 / 966650 . On the basis of this evaluation criterion, Blue Moose Home Builders should INVEST / NOT INVEST in the project because the project WILL / WILL NOT increase the firms value.

A project with a negative NPV will have a PI that is EQUAL TO 1.0 / LESS THAN 1.0 / GREATER THAN 1.0 ; when it has a PI of 1.0, it will have an NPV GRETER THAN $0 / LESS THAN 0 / EQUAL TO 0 .

9. Profitability index 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: Blue Moose Home Bulders is considering investing 52,225,000 in a project that is expected to generate the following net cash flows: Blue Moose Home Bulders uses a WACC of 10% when evaluating proposed capital budgeting prejects. Based on these cash flows, determine this project's PI (rounded to four decimal places): 0.56560.62220.65040.5373 Blue Moose Home Bulders's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's P1, the firm should the project. By comparison, the NPV of this project is . On the basis of this evaluation eriterion, Blue Moose Mome Builders 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 P1 of 1.0, it will have an NPV