Question

Good Morning Food, Inc. is using the profitability index (PI) when evaluating projects. You have to find the PI for the company’s project, assuming the company’s cost of capital is 12.05 percent. The initial outlay for the project is $374,333. The project will produce the following end-of-the-year after-tax cash inflows of

Year 1: $138,270

Year 2: $1,735

Year 3: $13,342

Year 4: $254,678

Round the answer to two decimal places.

Answer 1

Ans PI = 0.78

Reject the project since NPV is less than 1.

Year	Project Cash Flows (i)	DF@ 12.05%	DF@ 12.05% (ii)	PV of Project ( (i) * (ii) )
1	138270	1/((1+12.05%)^1)	0.892	1,23,400.27
2	1735	1/((1+12.05%)^2)	0.796	1,381.90
3	13342	1/((1+12.05%)^3)	0.711	9,483.86
4	254678	1/((1+12.05%)^4)	0.634	1,61,563.77
		PV		2,95,829.80
	Total of PV of Cash Inflows			295829.80
	Cash Outflows			374333
	Profitability Index =			0.79