Reject/Accept

-1,813,597, -1,722,917, - 1,994,957

Invest, Not Invest

Will / Will not

Equal to 1.0 / Greater than 1.0 / less than 1.0

NPV / IRR

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: Fuzzy Badger Transport Company is considering investing $3,225,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $500,000 $500,000 $400,000 Fuzzy Badger Transport Company 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): O 0.4595 O 0.5251 0.4376 O 0.3938 Fuzzy Badger Transport Company'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, Fuzzy Badger Transport Company should increase the firm's value. 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 The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm's strategic goals. Companies often use several methods to evaluate the project's cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. is the single best method to use when making capital budgeting decisions