Phoxco Would Like to Automate Its Calligraphy Operation

question 10

Multiple Choice

Phoxco would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is:

• A) 1.55
• B) 1.57
• C) 0.67
• D) 0.65