Compute the PI statistic for Project Z if the appropriate cost of capital is 7 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project Z Time: 0 1 2 3 4 5 Cash flow: –$1,100 $370 $500 $670 $320 $120

Profitability index(PI statistic) = 1.43

Explanation:

Profitability index otherwise known as PI statistic measures the ratios of cash flows of a project to the initial investment. It is used to measure whether a project is profitable or not.

Profitability index = (present value of future cash flows)/investments

PV = 370/(1.07)^1 + 500/(1.07)^2 + 670/(1.07) + 320/(1.07)^4 + 120/(1.07)^5

PV of cash flows = 1569.1181436    

Profitability index(PI statistic) = 1569.1181436/1100 = 1.426471039

Profitability index(PI statistic) = 1.43

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