11. Profitability index Estimating the cash flow generated by $1 invested in investment The profitabitity index (PI) is a capltal budgeting tool that provides another way to compare a project's benefits and costs. It is computed as a ratio of the discounted value of the net cash flows expected to be generated by a project over its life (the project's expected benefits) to its net cost (NiNV). A project's Pl value con be interpreted to indicate a project's discounted return generated by each dollar of net investment required to eenerate those returns. Purple Whale Foodstuffs is considering investing $400,000 in a project that is expected to generate the following net cash flows: Purple Whale uses a WACC of 10% when evaluating proposed capital budgeting projects, Based on theie cash flows, determine this project's pt (rounded to four decimal places) 2.6321 3.2901 2.9611 3,4545 Purple Whale's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the net present value (NPV) of this project is . On the basis of this evaluation criterion, Purple Whale should in the profect because the project. increase the firms value. When a project has a PI greater than 1.00 , it will exhibit an NPV I when it has a PI of 1.00 , it will have an NPV equal to 50. Projects with P/s 1,00 will exhibit negative NPVs