11. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Free Spirit Industries is comsidering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 Year 2 $375,000 $450,000 $500,000 $425,000 Year 3 Year 4 Free Spirit Industries uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places) 0 0.6618 0.5515 O 0.6067 O 0.5791 Free Spirit Industries's decision to accept or reject this project independent of its decisions on other projects. Based on the projects PL, the firm should the project By comparison, the NPV of this project is the project because the project On the basis of this evaluation criterion, Free Spirit Industries should Increase the firm's value when it has a PI of 1,0, it will have an NPV A project with a negative NPV will have a Pl that is