Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, | use the PI to determine which projects the company should accept. What is the Pl of project A? (Round to two decimal places.) Project A should be (Select from the drop-down menu.) i Data Table What is the Pl of project B? (Round to two decimal places.) (Click on the following icon e in order to copy its contents into a spreadsheet.) Project B should be (Select from the drop-down menu.) Cash Flow Project A Project B Year 0 - $1,800,000 - $2,500,000 Year 1 $300,000 $1,250,000 Year 2 $450,000 $1,100,000 $950,000 $800,000 Year 3 $600,000 Year 4 $750,000 $900,000 Year 5 $650,000 Discount rate 4% 13%
Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, | use the PI to determine which projects the company should accept. What is the Pl of project A? (Round to two decimal places.) Project A should be (Select from the drop-down menu.) i Data Table What is the Pl of project B? (Round to two decimal places.) (Click on the following icon e in order to copy its contents into a spreadsheet.) Project B should be (Select from the drop-down menu.) Cash Flow Project A Project B Year 0 - $1,800,000 - $2,500,000 Year 1 $300,000 $1,250,000 Year 2 $450,000 $1,100,000 $950,000 $800,000 Year 3 $600,000 Year 4 $750,000 $900,000 Year 5 $650,000 Discount rate 4% 13%
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:## Profitability Index (PI) Analysis
### Task Overview
Given the discount rate and the future cash flow of each project listed in the table below, use the PI to determine which projects the company should accept.
#### Computation Steps:
1. **Calculate the PI of Project A:**
- **Formula:** PI = (Net Present Value of Future Cash Flows) / Initial Investment
- Substitute values and round to two decimal places.
2. **Decide on Project A:**
- Choose from the drop-down menu based on the computed PI value.
3. **Calculate the PI of Project B:**
- Use the same formula as for Project A.
- Round to two decimal places.
4. **Decide on Project B:**
- Make a selection from the drop-down menu based on the computed PI value.
### Data Table
The table below provides the annual cash flows for both projects, as well as their respective discount rates.
| **Cash Flow** | **Project A** | **Project B** |
|---------------|----------------|----------------|
| **Year 0** | -$1,800,000 | -$2,500,000 |
| **Year 1** | $300,000 | $1,250,000 |
| **Year 2** | $450,000 | $1,100,000 |
| **Year 3** | $600,000 | $950,000 |
| **Year 4** | $750,000 | $800,000 |
| **Year 5** | $900,000 | $650,000 |
| **Discount Rate** | 4% | 13% |
### Instructions
- Click the icon above the data table to copy its contents into a spreadsheet for easier calculations.
- Use spreadsheet software to perform NPV calculations by discounting future cash flows using the provided discount rate, then compute the PI.
- Once you have computed the PI values for Projects A and B, make an informed decision on which project(s) to accept based on their profitability index.
**Note:** A PI greater than 1 indicates a potentially profitable project.
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