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:

Blue Moose Home Builders is considering investing $$2,500,000$ in a project that is expected to generate the following net cash flows:

Year $3$$$500,000$

Year $4$$$500,000$

Blue Moose Home Builders uses a WACC of $7\%$ when evaluating proposed capital budgeting projects. Based on these cash flows, determine this

project's PI $($rounded to four decimal places$)$

$0\mathrm{.}5731$

$0\mathrm{.}6335$

$0\mathrm{.}6033$

$0\mathrm{.}7240$

Blue Moose Home Builders'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, Blue Moose Home Builders should

in the project because the project

increase the firm's value.