Blank 1: Accept / Reject

Blank 2: N/A (number npv)

Blank 3: invest / not invest

Blank 4: will / will not

Blank 5: equal to $0 / less than $0 / greater than $0

Blank 6: equal to / greater than / less than

3. Profitability index Estimating the cash flow generated by $1 invested in investment The profitability index (PI) is a capital 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 PI 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 Free Spirit Industries Inc.: Free Spirit Industries Inc. is considering investing $600,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $425,000 Year 3 $500,000 Year 4 $475,000 Free Spirituses 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): O 2.0605 O 2.2773 0 2.1689 O 2.3858 Free Spirit'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. . On the basis of this evaluation criterion, Free Spirit should By comparison, the net present value (NPV) of this project is in the project because the project increase the firm's value. ; when it has a PI of 1.00, it will have an NPV equal to $0. When a project has a PI greater than 1.00, it will exhibit an NPV Projects with PIS 1.00 will exhibit negative NPVs