7.) What is the profitability index for the following set of cash flows if the relevant...

7.) What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?

Year	Cash Flow
0	?$15,300
1	9,400
2	7,600
3	4,300

Expert Solution

a) Calculation of profitability index:

Time	PVF @10%	Amount	PV
1.00	0.9091	9,400.00	8,545.45
2.00	0.8264	7,600.00	6,280.99
3.00	0.7513	4,300.00	3,230.65
present value			18,057.10
Profitability index= present value of future cashflows/initial investment

Profitability index= 18057.10/15300=1.18

b) Calculation of profitability index:

Time	PVF @15%	Amount	PV
1.00	0.8696	9,400.00	8,173.91
2.00	0.7561	7,600.00	5,746.69
3.00	0.6575	4,300.00	2,827.32
present value			16,747.92
Profitability index= present value of future cashflows/initial investment

Profitability index= 16747.92/15300=1.09

c) Calculation of profitability index:

Time	PVF @22%	Amount	PV
1.00	0.8197	9,400.00	7,704.92
2.00	0.6719	7,600.00	5,106.15
3.00	0.5507	4,300.00	2,368.04
present value			15,179.11
Profitability index= present value of future cashflows/initial investment

Profitability index= 15179.11/15300=0.99

jeff jeffy answered 2 years ago

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