In: Finance
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $390,000, to be paid immediately. Bill expects aftertax cash inflows of $85,000 annually for six years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 10 percent. |
What is the project’s profitability index (PI)? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) |
Profitability index is calculated using the below formula:
Profitability Index= NPV + Initial investment/ Initial investment
Net present value is calculated using a financial calculator by inputting the below:
The net present value of cash flows is -$19,802.84.
Profitability Index= -$19,802.84.+$390,000/$390,000
= $370,197.16/ $390,000
= 0.9492
Therefore, the project’s profitability index is 0.949.
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