Question

In: Finance

Year Cash Flow 0 −$9,600           1 2,600           2 3,700           3 3,900      &nb

Year Cash Flow
0 −$9,600          
1 2,600          
2 3,700          
3 3,900          

  

(a) What is the profitability index for the cashflows if the relevant discount rate is 9 percent?
$0.842   $0.931   $0.913   $0.887   $0.86

  

(b) What is the profitability index for the cashflows if the relevant discount rate is 15 percent?
$0.834   $0.754   $0.794   $0.818   $0.77

  

(c) What is the profitability index for the cashflows if the relevant discount rate is 27 percent?
0.67   0.651   0.683   0.618   0.631

Solutions

Expert Solution

Ans a) 0.887

b) 0.794

c) 0.651

Year Project Cash Flows (i) DF@ 9% DF@9% (ii) PV of Project ( (i) * (ii) ) DF@ 15% (iii) PV of Project ( (i) * (iii) ) DF@ 27% (iv) PV of Project ( (i) * (iv) )
1 2600 1/((1+9%)^1) 0.917431                               2,385.32 0.870                  2,260.87 0.787           2,047.24
2 3700 1/((1+9%)^2) 0.841680                               3,114.22 0.756                  2,797.73 0.620           2,294.00
3 3900 1/((1+9%)^3) 0.772183                               3,011.52 0.658                  2,564.31 0.488           1,903.94
NPV                               8,511.05 NPV                  7,622.91 NPV           6,245.19
Total of PV of Cash Inflows 8511.05 7622.91 6245.19
Cash Outflows 9600 9600 9600
Profitability Index = 0.887 0.794 0.651
Present value of cash Inflow / Initial Investment (Cash Outflows) (8511.05/9600) (7622.91/9600) (6245.19/9600)

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