Question: (PI) The Potomac Transit Authority (PTA) is considering adding a new bus route. To add the route, PTA would be required to purchase a new

(PI) The Potomac Transit Authority (PTA) is considering adding a new bus route. To add the route, PTA would be required to purchase a new bus, which would have a life of 10 years and cost $180,000. If the new bus is purchased, PTA managers expect that net cash inflows from bus ridership would rise by $31,000 per year for the life of the bus. The PTA uses a 9 percent required rate of return for evaluating capital projects. No salvage value is expected from the bus at the end of its life.

a. Compute the profitability index of the bus investment (ignore tax).

b. Should the PTA buy the new bus?

c. What is the minimum acceptable value for the profitability index for an in¬ vestment to be acceptable?

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