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:

Free Spirit Industries is considering investing $3,000,000 in a project that is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$375,000
Year 2	$425,000
Year 3	$500,000
Year 4	$450,000

1. Free Spirit Industries uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this projects PI (rounded to four decimal places)

A) 0.5042

B) 0.4355

C) 0.4813

D) 0.4584

2. 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 _____? (Accept, Reject) the project.

3. By comparison, the NPV of this project is _____? (-$1,624,838, -$1,949,806, or -$1,543,596) . On the basis of this evaluation criterion, Free Spirit Industries should in the project because the project _____? (will not, will) increase the firms value.

4. A project with a negative NPV will have a PI that is _____? (less than 1.0, greater than 1.0, equal to 1.0) ; when it has a PI of 1.0, it will have an NPV _____? (equal to $0, greater than $0, less than $0) .