What is the profitability index for the cashflows if the relevant discount rate is 8 percent?

Year	Cash Flow
0	−$7,800
1	3,600
2	3,500
3	4,000

Required :

(a)	What is the profitability index for the cashflows if the relevant discount rate is 8 percent?

	(Click to select) $1.158 $1.219 $1.28 $1.256 $1.183

(b)	What is the profitability index for the cashflows if the relevant discount rate is 14 percent?

	(Click to select) $1.129 $1.063 $1.096 $1.041 $1.151

(c)	What is the profitability index for the cashflows if the relevant discount rate is 25 percent?

	(Click to select) 0.919 0.965 0.891 0.947 0.873

Expert Solution

Profitability index = Present value of cash flows / Initial investment

a. Profitability index = (3,600/1.08 + 3,500/1.08^2 + 4,000/1.08^3) / 7,800 = 1.219

b. Profitability index = (3,600/1.14 + 3,500/1.14^2 + 4,000/1.14^3) / 7,800 = 1.096

c. Profitability index = (3,600/1.25 + 3,500/1.25^2 + 4,000/1.25^3) / 7,800 = 0.919

jeff jeffy answered 2 years ago

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