Question

Consider the following project being analyzed for possible investment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 Inflow Year 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10 All amounts are in millions. The required return for the project is 8%. The project’s profitability index is: (Enter your answer out to two decimal places. As an example, you would enter 1.50 as 1.50)

Answer 1

The project profitability index is 1.14
Working:
Calculation of present value of cash inflows:
Year	Cash inflow	Discount factor	Present value of cash inflows
a	b	c=1.08^-a	d=b*c
1	$    15.00	0.925926	$    13.89
2	$    15.00	0.857339	$    12.86
3	$    20.00	0.793832	$    15.88
4	$    10.00	0.73503	$       7.35
5	$    10.00	0.680583	$       6.81
	Total		$    56.78
Calculation of profitability index:
Profitability index		=	Present value of cash inflows	/	Initial cost of the project
		=	$    56.78	/	$    50.00
		=	1.14