Question

1. Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.89 million and create incremental cash flows of $591,981.00 each year for the next five years. The cost of capital is 8.34%. What is the profitability index for the J-Mix 2000?

Round to 3 decimal places

Answer 1

	Year	Cashflows	PVF@ 8.34%	PV
A	0	$      1,890,000	1	$        1,890,000
		PV of Cash Outflows		$        1,890,000
B	1	$         591,981	0.9230	$      546,410.37
	2	$         591,981	0.8520	$      504,347.77
	3	$         591,981	0.7864	$      465,523.14
	4	$         591,981	0.7258	$      429,687.23
	5	$         591,981	0.6700	$      396,609.96
		PV of Cash Inflows		$ 2,342,578.47

Computing Profitability Index

Profitability Index = PV of Cash Inflows / PV of Cash Outflows

Profitability Index = B/A

Profitability Index = $ 2,342,578.47 / $ 1,890,000

Profitability Index = 1.2395 = 1.239 (approx)