Question 6

Assume the firm invests $103,000 today to get $29,000 at Year 1 (i.e. one year from now), $26,000 at Year 2, $39,000 at Year 3, $35,500 at Year 4, $25,500 at Year 5, and $25,500 at Year 6. Assuming the required rate of return for the firms industry is 10.2%, what is this projects profitability index?

Group of answer choices

1.13

1.27

0.13

0.27

Question 7

Same facts as above, but assume that the firm expands its investment such that the revenues will go up by 24%, but the discount rate will also increase to 22%. What is the new profitability index?

Group of answer choices

1.15

0.15

1.35

0.35

Flag question: Question 8

Question 8

Same facts as Questions 6 and 7: Which of the following best describes how this project's Profitability Index changes based on the increase in revenues by 24% and a corresponding increase in the discount rate to 22%?

Group of answer choices

The Profitability Index slightly increases because there are increase in revenues, which increases the Profitability Index, and increase in discount rate that does not affect the Profitability Index.

The Profitability Index slightly increases because the increase in revenues is offset by the increase in the discount rate, since a higher discount rate decreases the Net Present Value and therefore the Profitability Index.

The Profitability Index slightly decreases because the increase in discount rate overshadows any benefits form the increase in revenue.

The Profitability Index slightly decreases because the increase in revenues does not affect the Profitability Index, while the increase in discount rate generally decreases the Profitability Index.