A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project

c) Reject the project because the PI is .97

Explanation:

For recommendation, first we have to find out the profitability index which is shown below:

PI = Present value of Cash Inflows ÷ Initial Investment

= [($56,400 ÷ 1.155) + ($75,900 ÷ 1.1552)] ÷ $109,200

= [$48,831.17 + $56,895.49] ÷ $109,200

= $105,726.65 ÷ $109,200

= 0.97

Since as we can see that the profitability index is 0.97 and the required return is $1.06 so the project should be rejected  

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