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18 A firm is considering an investment project which requires the initial outlay of $10 million....

18 A firm is considering an investment project which requires the initial outlay of $10 million. The 12-year project is expected to generate annual net cash flows each year of $1 million and have the expected terminal value at the end of the project of $5 million. The cost of capital is 6 percent, and its marginal tax rate is 40 percent. Calculate the profitability index of this project.

0.84

0.09

1.70

1.34

1.09

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Expert Solution

profitability index of this project.is 1.09
Statement showing Cash flows
Particulars Time PVf 6% Amount PV
Cash Outflows                            -                       1.00 (10,000,000.00) (10,000,000.00)
PV of Cash outflows = PVCO (10,000,000.00)
Cash inflows                       1.00                 0.9434        1,000,000.00            943,396.23
Cash inflows                       2.00                 0.8900        1,000,000.00            889,996.44
Cash inflows                       3.00                 0.8396        1,000,000.00            839,619.28
Cash inflows                       4.00                 0.7921        1,000,000.00            792,093.66
Cash inflows                       5.00                 0.7473        1,000,000.00            747,258.17
Cash inflows                       6.00                 0.7050        1,000,000.00            704,960.54
Cash inflows                       7.00                 0.6651        1,000,000.00            665,057.11
Cash inflows                       8.00                 0.6274        1,000,000.00            627,412.37
Cash inflows                       9.00                 0.5919        1,000,000.00            591,898.46
Cash inflows                     10.00                 0.5584        1,000,000.00            558,394.78
Cash inflows                     11.00                 0.5268        1,000,000.00            526,787.53
Cash inflows = 1M + 5M                     12.00                 0.4970        6,000,000.00        2,981,816.18
PV of Cash Inflows =PVCI      10,868,690.76
PI = PVCI/PVCO = 10,868,690.76/10,000,000                         1.09

jeff jeffy answered 2 years ago
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