Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost...

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.)

Expert Solution

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:

Press the CF button.
CF0= -$390,000. 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 required return of 10%.
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 -$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.

In case of any query, kindly comment on the solution

jeff jeffy answered 1 month ago

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