What is the profitability index of project with ten percent

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Reference no: EM132770322

Average Joe's Motor Company plans to sell robots for the manufacturing of automobiles to the Japanese auto makers. Two years ago, Average Joe's Motor Co. hired an outside consultant to look into robotic manufacturing at a cost of $200,000. They project sales revenue to be $10,000,000 per year. The robotic manufacturing equipment will initially cost $10,000,000 and require $750,000 to install. The robotic manufacturing equipment will be depreciated using a 3-Year MACRS schedule. The firm expects to be able to sell the robotic manufacturing equipment for $3,000,000 at the end of the 2nd Year. There will be an initial savings of $500,000 for net working capital. Variable costs are $3,000,000 and fixed costs are $2,500,000 per year. Assume a 30% tax rate.

Problem 1: What is the Profitability Index (P/I) of this project with a 10% discount rate? Should we accept/reject this project?

Group of answer choices

Option 1: .9123 / Reject

Option 2: .9123 / Accept

Option 3: .8876 / Reject

Option 4: .8894 / Reject

Reference no: EM132770322

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