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: Rinsemator Group is considering investing $2,225,000 in a project that is expected to generate the following net cash flows: Rinsemator Group uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI: Year Cash Flow Year 1 $275,000 Year 2 $425,000 Year 3 $475,000 Year 4 $400,000 0.5257 O 0.6641 O 0.5534 O 0.4981 Rinsemator Group'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, Rinsemator Group should in the project because the project 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 Rinsemator Group'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. reject accept By comparison, the NPV of this project is Group should in the projed On the basis of this evaluation criterion, Rinsemator lject increase the firm's value. -$993,680 -$1,192,416 -$794,944 By comparison, the NPV of this project is On the basis of this evaluation criterion, Rinsemator Group should in the project because the project increase the firm's value. not invest invest By comparison, the NPV of this project is . On the basis of this evaluation criterion, Rinsemator Group should in the project because the project increase the firm's value. will will not 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 less than 1.0 equal to 1.0 greater than 1.0 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 greater than $0 less than $0 equal to $0