Free Spirit Industries uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this projects PI (rounded to four decimal places):

0.4968

0.4258

0.4731

0.4494

Free Spirit Industriess decision to accept or reject this project is independent of its decisions on other projects. Based on the projects PI, the firm should REJECT OR ACCEPT the project.

By comparison, the NPV of this project is ? . On the basis of this evaluation criterion, Free Spirit Industries should INVEST OR NOT INVEST in the project because the project WILL OR WILL NOT increase the firms value.

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

11. 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 is considering investing $2,750,000 in a project that is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $400,000 Year 3 $450,000 Year 4 $450,000 Free Spirit Industries 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): 0.4968 0.4258 0.4731 0.4494 Free Spirit Industries'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 . On the basis of this evaluation criterion, Free Spirit Industries should increase the firm's value. the project because the project 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