question archive Compute the PI statistic for Project Z if the appropriate cost of capital is 6 percent
Compute the PI statistic for Project Z if the appropriate cost of capital is 6 percent
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Compute the PI statistic for Project Z if the appropriate cost of capital is 6 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
| Project Z | ||||||
| Time: | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow: | –$2,500 | $650 | $780 | $950 | $600 | $400 |
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Profitability Index (PI) = Present Value of Future Cash Flows / Initial Investment
PV of cash inflow= $650/(1+.06)^1 + $780/(1+.06)^2+ $950/(1+.06)^3 + $600/(1+.06)^4 + $400/(1+.06)^5
PV of cash inflow= $2879.21
Initial Investment= $2500
PI= PV of cash inflow/Initial investment
PI= 2879.21/2500
PI= 1.1517
The project should be accepted as PI is more than one.
