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2 August, 09:43

Compute the PI statistic for Project Z if the appropriate cost of capital is 7 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: - $1,100 $370 $500 $670 $320 $120

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  1. 2 August, 10:08
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    Answer: Profitability index (PI statistic) = 1.43

    Explanation:

    Profitability index otherwise known as PI statistic measures the ratios of cash flows of a project to the initial investment. It is used to measure whether a project is profitable or not.

    Profitability index = (present value of future cash flows) / investments

    PV = 370 / (1.07) ^1 + 500 / (1.07) ^2 + 670 / (1.07) + 320 / (1.07) ^4 + 120 / (1.07) ^5

    PV of cash flows = 1569.1181436

    Profitability index (PI statistic) = 1569.1181436/1100 = 1.426471039

    Profitability index (PI statistic) = 1.43
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