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

Solutions

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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