Phoxco Would Like to Automate Its Calligraphy Operation

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

Correct Answer:

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