The profitability index (PI)is a capital budgeting tool that provides another way to compare a project's benefits and costs. It is computed as a ratio of the discounted value of the net cash flows expected to be generated by a project over its life (the project's expected benefits) to its net cost (NINV). A project's PI value can be interpreted to indicate a project's discounted return generated by each dollar of net investment required to generate those returns. Consider the case of Fuzzy Badger Transport Company: Fuzzy Badger Transport Company is considering investing $450,000 in a project that is expected to generate the following net cash flows: Fuzzy Badgeruses a WACC of 7 % when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four Year Cash Flow Year 1 $325,000 decimal places): $500,000 Year 2 O 3.4939 O 2.6999 O 3.1763 O 3.0175 Year 3 $400,000 Year 4 $475,000 Fuzzy Badger's decision to accept or reject this project is independent of its decisions on other projects. Based on the the project. project's P1, the firm should On the basis of this evaluation By comparison, the net present value (NPV) of this project is increase the firm's value. in the project because the project criterion, Fuzzy Badger should t has a PI of 1.00, it will When a project has a PI greater than 1.00, it will exhibit an NPV 1.00 will exhibit negative NPVS. have an NPV equal to $0. Projects with PIs IMG 12 IMG 1286.jpg IMG 1287.jpq IMG 1290.jpg Ho F12 F11 F10 F9 F8 F7 F6 F5 F4 F3 0 9 7 5 4 CO