Question

The following are the cash flows of two projects:

Year    Project A    Project B

0 -250    -250

1    130    150

2    130    150

3    130    150

4    130

If the opportunity cost is 10%, what is the profitability index for each project?

Project Profitability Index

A

B

  

Answer 1

Project A Year Cashflow PV Factor @ 10% PV 0 -250 1 $ -250.00 1 130                      0.9091 $   118.18 2 130                      0.8264 $   107.44 3 130                      0.7513 $     97.67 4 130                      0.6830 $     88.79 NPV $   162.08 Profitability Index = Initial Investment + NPV/ Initial Investment                                   =$250 +162.08/$250                                    =$412.08/$250                                 =          1.65 Project B Year Cashflow PV Factor @ 10% PV 0 -250 1 $ -250.00 1 150                      0.9091 $   136.36 2 150                      0.8264 $   123.97 3 150                      0.7513 $   112.70 NPV $   123.03 Profitability Index = Initial Investment + NPV/ Initial Investment                                   =$250 +$123.03/$250                                    = $ 373.03 /$250                                 =          1.49 Project Profitability Index A                              1.65 B                              1.49