A project has an initial cost of $37,875, expected net cash inflows of $12,000 per year...

A project has an initial cost of $37,875, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 12%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Expert Solution

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value is calculated using a financial calculator by inputting the below:

Press the CF button.
CF0= -$37,875. It is entered with a negative sign since it is a cash outflow.
Cash flow for each year should be entered.
Press Enter and down arrow after inputting each cash flow.
After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 12%.
Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $21,736.68.

Profitability Index= $21,736.68 + $37,875/ $37,875

= $59,611.68/ $37,875

= 1.57.

In case of any query, kindly comment on the solution.

jeff jeffy answered 4 months ago

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