Use the following cash flows to answer: Year 0 = ($1,550); Year 1 = $850; Year...

Use the following cash flows to answer:

Year 0 = ($1,550); Year 1 = $850; Year 2 = $900. The firms WACC = 8%.

What is the Profitability Index (PI)?

	a)	0.0056
	b)	1.01
	c)	1.51
	d)	1.13

Expert Solution

Wacc = 8% ; this we can use in calculation of present value of the investment

CACULATION OF PRESTN VALUE OF THE INVESTMENT

Period	Particulars	Amount	PVF of $ 1 $ 8%	Present Value
0	Outflow	$ -1,550.00	$ 1.000	$ -1,550.00
1	Inflow	$ 850.00	$ 0.926	$ 787.04
2	Inflow	$ 900.00	$ 0.857	$ 771.60
	Total			$ 8.64

CACULATION OF PROFITABILITY INDEX OF INVESTMENT

Profitability Index = 1 + Net present Value / Initial investment
Profitability Index = 1 +		$ 8.64	"/" By	$ 1,550.00
Profitability Index = 1 +		0.01
Profitability Index =		1.01


Answer Profitability index = 1.01

jeff jeffy answered 2 years ago

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