Question $1[5$ marks$]$

Table below summarizes annual cash flows expected from a firm$$s project at the end of each year:

Year $123$

Cash flow $55,000242,00066,550$

The project requires an upfront investment cost of $$290,000.$ The required rate of return on the project is $10\%.$ Using the information, answer questions a$)$ and b$)$ below.

$($Lecture notes pp$\mathrm{.}11-12,$ p$\mathrm{.}19)$

a$)$ If the firm$$s investment policy requires all new projects to have a payback period of $3$ years or less, will the project be accepted?

Answer $($show the steps$/$calculation toward your results$)$:

b$)$ Calculate the Profitability Index of the project. If the firm accepts projects with a Profitability Index of $1\mathrm{.}2$ or higher, will the project be accepted?

Answer $($show the steps$/$calculation toward your results$)$: