A project has an initial cost of $62,150, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 14%.

Problem 10-4
Profitability Index

A project has an initial cost of $62,150, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 14%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Solutions

Expert Solution

Given information

1) Initial out flow cosr = $62,150

2) net cash inflows= $12,000 per year for 8 years

profitability index = Present calue of cash inflows/ present value of cash out flows

a) calculation of present value of cash inflows

Present value of casj infows= annual amount*PVAF( r,n)

here r = 14%

n = 8 years

annual amount = $12,000

present value of cash inflows = 12000*PVAF(0.14,8)

= 12,000*4.63886

=55,666.32

present value of cash inflows = 55,666.32

b) calculation of profitability index

profitability index = present value of cash inflows / present value of cash out flows

= 55,666.32/62,150

= 0.89567

= 0.90 ( rounded off to two decimals)

jeff jeffy answered 2 years ago

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