Question

-What is the Profitability Index of a project that costs $28,000 today and is expected to generate annual cash inflows of $3,000 for the following 11 years. Use discount rate of 7%. Round to two decimal places.

-Installing a solar panel system on your roof comes with a total upfront cost of $18,000 after all tax credits. If the solar panels reduce your utility bill by $1000 per year, what is the Payback Period of installing the solar panel system? Round to one decimal place.

Answer 1

Profitability index= Net present value + Initial investment/ Initial investment

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

• Press the CF button.
• CF0= -$28,000. 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 discount rate of 7%.
• 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 -$5,503.9770 -$5,503.98.

Profitability index= -$5,503.98 + $28,000/ $28,000

                                   = $22,496.02/ $28,000

                                   = 0.8034   0.80

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                              = $1,000*18= $18,000

                              =18 years.

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