Miller's Is Considering a 2-Year Expansion Project That Will Require

question 33

Multiple Choice

Miller's is considering a 2-year expansion project that will require $410,000 up front.The project will produce cash flows of $358,000 and $98,000 for Years 1 and 2,respectively.Based on the profitability index (PI) rule,should the project be accepted if the discount rate is 12 percent? Why or why not?

• A)Yes;because the PI is 1.03
• B)Yes;because the PI is .97
• C)Yes;because the PI is .94
• D)No;because the PI is 1.03
• E)No;because the PI is .97

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Definitions:

Depreciated Separately

An accounting method in which assets are depreciated individually, based on their own useful life and depreciation rate, rather than being grouped together with other assets.

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) that serve as a global framework for financial statements.

Sum-Of-The-Years'-Digits

An accelerated depreciation method that calculates annual depreciation by adding the asset's expected life years, assigning weights to each year, and depreciating more heavily in the earlier years.

Depreciation Estimates

Projections or calculations of the reduction in the value of an asset over time, used for accounting and taxation purposes.