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 projects cash inflows divided by the absolute value of its initial cash outflow. Consider this case:

Purple Whale Foodstuffs Inc. is considering investing $2,500,000 in a project that is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$375,000
Year 2	$400,000
Year 3	$475,000
Year 4	$475,000

Purple Whale Foodstuffs Inc. uses a WACC of 8% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this projects PI (rounded to four decimal places):

0.5099

0.5665

0.6232

0.5948

Purple Whale Foodstuffs Inc.s decision to accept or reject this project is independent of its decisions on other projects. Based on the projects PI, the firm should REJECT/ACCEPT the project.

By comparison, the NPV of this project is ______ . On the basis of this evaluation criterion, Purple Whale Foodstuffs Inc. should INVEST/NOT INVEST in the project because the project WILL/ WILL NOT increase the firms value.

A project with a negative NPV will have a PI that is EQUAL/GREATER/LESS THAN 1.0 ; when it has a PI of 1.0, it will have an NPV EQUAL/GREATER/LESS THAN $0.