Question

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow −100,000 30,000 45,000 55,000 30,000 10,000 Use the PI decision rule to evaluate this project; should it be accepted or rejected?

Answer 1

The profitability index decision rule of the project equals 2.45 year and thus, the project should be accept to be embarked on.

What is a profitability index?

The rule refers to a decision-making exercise that helps to evaluate whether to proceed with a project based on its profitability.

Hence, because the profitability index decision rule of the project equals 2.45 year and thus, the project should be accept to be embarked on.

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