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

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)

jeff jeffy answered 2 years ago

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