(PI) Bellingham Bus Company (BBC) is considering adding a new bus route. To do so, BBC would be required to purchase a new bus, which would cost $500,000, have a 10-year life, and have no salvage value. If it purchases the new bus, BBC managers expect that net cash inflows from bus ridership would rise by $78,000 per year for the life of the new bus. The BBC uses an 8 percent required rate of return for evaluating capital projects.

a. Compute the profitability index of the bus investment.

b. Should the BBC buy the new bus?

C. What is the minimum acceptable value for the profitability index for an investment to be acceptable? Explain.

 LO.1