In: Finance
The following are the cash flows of two projects:
| Year | Project A | Project B | ||||
| 0 | ?$ | 380 | ?$ | 380 | ||
| 1 | 210 | 280 | ||||
| 2 | 210 | 280 | ||||
| 3 | 210 | 280 | ||||
| 4 | 210 | |||||
If the opportunity cost of capital is 11%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
Profitability Index (PI) for the Project-A
| 
 Year  | 
 Annual cash inflow ($)  | 
 Present Value factor at 11%  | 
 Present Value of Annual cash inflow ($)  | 
| 
 1  | 
 210  | 
 0.900901  | 
 189.19  | 
| 
 2  | 
 210  | 
 0.811622  | 
 170.44  | 
| 
 3  | 
 210  | 
 0.731191  | 
 153.55  | 
| 
 4  | 
 210  | 
 0.658731  | 
 138.33  | 
| 
 TOTAL  | 
 651.51  | 
||
Profitability Index (PI) for the Project = Present Value of annual cash inflows / Initial Investment
= $651.51 / $380
= 1.7145
Profitability Index (PI) for the Project-B
| 
 Year  | 
 Annual cash inflow ($)  | 
 Present Value factor at 11%  | 
 Present Value of Annual cash inflow ($)  | 
| 
 1  | 
 280  | 
 0.900901  | 
 252.25  | 
| 
 2  | 
 280  | 
 0.811622  | 
 227.25  | 
| 
 3  | 
 280  | 
 0.731191  | 
 204.74  | 
| 
 TOTAL  | 
 684.24  | 
||
Profitability Index (PI) for the Project = Present Value of annual cash inflows / Initial Investment
= $684.24 / $380
= 1.8006
NOTE
The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.