9. Profitability index Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a copital budgeting tool that provides another way to compare a project's benenits 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 can be interpreted to indicate a project's discounted return generated by each dollar of net investment required to generate those returns. Consider the case of Fuzzy Badger Transport Company: Fuzzy Badger Transport Company is considering investing $600,000 in a project that is expected to generate the following net cash flows: Fuzzy Badger uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places). 2.2057 2.0954 Fuzzy Badger uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's pi (rounded to four decimel pleces). 2.2057 2.0954 2.3160 1.6748 Fuzzy Badper's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's pt, the firm should the project. By comperison, the net present value (NPV) of this project is . On the basis of this evaluation criterion, Fuxzy Badger should in the project because the project increase the firm's value. When a project has a f1 greater than 1.00 , it will exhibit an NPV I when it has a Pt of 1.00, it will have an NPV equal to so. Projects with Pis 1.00 will eahibit negative NPVs