Based on the Profitability Index Rule, Should a Project with the Following

question 11

Multiple Choice

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?

• A)Yes; The PI is 0.96.
• B)Yes; The PI is 1.04.
• C)Yes; The PI is 1.08.
• D)No; The PI is 0.96.
• E)No; The PI is 1.04.

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Definitions:

Business Risk

encompasses the potential for a firm's operational or financial performance to suffer due to internal or external factors, impacting profitability and viability.

Absolute Priority Rule

A principle in bankruptcy proceedings that senior creditors are paid before junior creditors and equity holders.

Bankruptcy Proceeding

A legal process involving a person or business that is unable to repay outstanding debts, seeking relief through the court's protection.

Financial Leverage

The application of borrowed resources to escalate the anticipated yield of an investment.