Year Cash Flow 0 −$9,600 1 5,600 2 4,000 3 4,800 &nb

Year	Cash Flow
0	−$9,600
1	5,600
2	4,000
3	4,800

a. What is the profitability index for the cash flows if the relevant discount rate is 10 percent?

b. What is the profitability index for the cash flows if the relevant discount rate is 17 percent?

c. What is the profitability index for the cash flows if the relevant discount rate is 25 percent?

Expert Solution

Profitability index is Present value of future cashflows divided by initial investment.

A profitability index greater than 1 is deemed as good investment.

a) When relevant discount rate is 10%

Years	cash Flows	Discount factor @ 10%	Present value
1	5600	0.909090909	5090.909091
2	4000	0.826446281	3305.785124
3	4800	0.751314801	3606.311044
			12003.00526
Profitability index= $12003/$9600 = 1.25

b) When relevant discount rate is 17%

Years	cash Flows	Discount factor @ 17%	Present value
1	5600	0.854700855	4786.324786
2	4000	0.730513551	2922.054204
3	4800	0.624370556	2996.978671
			10705.35766
Profitability Index = $10705.36/$9600 = 1.115

c) When relevant discount rate is 25%

Years	cash Flows	Discount factor @ 25%	Present value
1	5600	0.8	4480
2	4000	0.64	2560
3	4800	0.512	2457.6
			9497.6
Profitability Index= $9497.6/$9600 = 0.989

jeff jeffy answered 2 years ago

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