Foodstuffs Inc. uses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this unded to four decimal places): 32 13 77 41 Foodstuffs Inc.'s decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the the project. the NPV of this project is in the project because the project a negative NPV will have a PI that is . On the basis of this evaluation criterion, Purple Whale Foodstuffs Inc. should increase the firm's value. ; when it has a PI of 1.0, it will have an NPV

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Purple Whale Foodstuffs Inc. uses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this
project's PI (rounded to four decimal places):
O 0.6332
0.5013
0.5277
O 0.5541
Purple Whale Foodstuffs Inc.'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 NPV of this project is
in the project because the project
A project with a negative NPV will have a PI that is
. On the basis of this evaluation criterion, Purple Whale Foodstuffs Inc. should
increase the firm's value.
; when it has a PI of 1.0, it will have an NPV
Transcribed Image Text:Purple Whale Foodstuffs Inc. uses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places): O 0.6332 0.5013 0.5277 O 0.5541 Purple Whale Foodstuffs Inc.'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 NPV of this project is in the project because the project A project with a negative NPV will have a PI that is . On the basis of this evaluation criterion, Purple Whale Foodstuffs Inc. should increase the firm's value. ; when it has a PI of 1.0, it will have an NPV
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:
Purple Whale Foodstuffs Inc. is considering investing $2,750,000 in a project that is expected to generate the following net cash flows:
Year
Year 1
Year 2
Year 3
Year 4
Cash Flow
$325,000
$450,000
$500,000
$500,000
Transcribed Image Text: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: Purple Whale Foodstuffs Inc. is considering investing $2,750,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $450,000 $500,000 $500,000
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