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: Khoshjamal Corp. is considering investing $2,225,000 in a project that is expected to generate the following net cash flows: Khoshjamal Corp. uses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI: Year Cash Flow Year 1 $275,000 Year 2 $475,000 Year 3 $425,000 Year 4 $450,000 O 0.5978 0.6875 0.6277 0.6576 O Khoshjamal Corp.'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 . On the basis of this evaluation criterion, Khoshjamal Corp. should in the project because the project increase the firm's value. increase A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV equal to 1.0 less than 1.0 greater than 1.0