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itability index (PI). What is each franchise's PI? t t \$60.11 = 1.19 PI s = \$63.64 + \$41.32 + \$15.03  = 1.20   \$100 ording to the PI, which franchise or franchises should be accepted if they are ANSWER: The profitability index (PI) is the present value of a project's cash inflows (CIF) divided by the present value of its cash outflows (COF):    n PI  =              CIF t      .  0               t = 0      (1+k)      n                       COF t     .  0               t = 0      (1+k)   Refer to the time line used to find Franchise L's NPV. Using these
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Unformatted text preview: figures, ANSWER: PI measures a project's "bang for the buck." In other words, PI gives the total dollar return per dollar of invested capital, all on a present value basis. Thus, L's PI of 1.19 means that L generates \$1.19 of value for each dollar invested. Projects are acceptable if their PIs are greater than 1.0, and the higher the PI, the "better" the project. Thus, both franchises should be accepted if they are independent, but Franchise S should be selected if they are mutually exclusive....
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