Profitability Index (Answer All Please)

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- Accept or Reject - -1880523, -1709566 or 1709566 - invest or not invest - will not or will - greater than 1.0 , less than 1.0 or equal to 1.0 - equal to $0 , greater than $0 or less than $0

Aa Aa E. 3. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index (P) 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 Builders is considering investing $3,000,000 in a project that is expected to generate the following net cash flows: Blue Moose Home Builders uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on Year Cash Flow these cash flows, determine this project's PI Year 1 $325,000 O 0.3871 Year 2 $425,000 O 0.5161 Year 3 425,000 O 0.4516 Year 4 $475,000 0.4301 Blue Moose Home Builders'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, Blue Moose By comparison, the NPV of this project is increase the firm's value. Home Builders should in the project because the project when it has a PI of 1.0, it will have an NPV A project with a negative NPV will have a PI that is