Question
In: Finance
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of...
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of capital is 5.40 percent. What is the PI of a project if the initial costs are $1,449,850 and the project life is estimated as 10 years? The project will produce the same after-tax cash inflows of $634,623 per year at the end of the year.
Round the answer to two decimal places.
Solutions
Expert Solution
| 5.4000% | |||
| Cash flows | Year | Discounted CF | Cumulative cash flow |
| (1,449,850.00) | 0 | -1449850.00 | -1449850 |
| 634,623.00 | 1 | 602109.11 | -847740.892 |
| 634,623.00 | 2 | 571261.01 | (276,479.88) |
| 634,623.00 | 3 | 541993.37 | 265,513.49 |
| 634,623.00 | 4 | 514225.21 | 779,738.70 |
| 634,623.00 | 5 | 487879.71 | 1,267,618.41 |
| 634,623.00 | 6 | 462883.97 | 1,730,502.38 |
| 634,623.00 | 7 | 439168.85 | 2,169,671.23 |
| 634,623.00 | 8 | 416668.74 | 2,586,339.98 |
| 634,623.00 | 9 | 395321.39 | 2,981,661.36 |
| 634,623.00 | 10 | 375067.73 | 3,356,729.09 |
NPV = 3,356,729
PI = 1 + 3,356,729/1,449,850 = 3.32
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