Ch 10: Assignment - The Basics of Capital Budgeting: Evaluating Cash Flows 9. 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 Inc. is considering investing $2,225,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Cash Flow $375,000 $475,000 $425,000 $425,000 Year 4 Free Spirit Industries Inc. uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's Pl (rounded to four decimal places): 0.6640 0.7243 O 0.6338 0.6036 10: Assignment - The Basics of Capital Budgeting: Evaluating Cash Flows Year 3 $425,000 $425,000 Year 4 Free Spirit Industries Inc. 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): O 0.6640 0.7243 0 0.6338 O 0.6036 Free Spirit Industries Inc.'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 NPV of this project is in the project because the project . On the basis of this evaluation criterion, Free Spirit Industries Inc. should increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a Pl of 1.0, it will have an NPV