Question

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Calculate the Profitability Index and the Net Present Value of the following project: Year 0 Investment...

Calculate the Profitability Index and the Net Present Value of the following project:

Year 0 Investment 75,000

Year 1 Income 25,000 PI ______________

Year 2 Income 35,000

Year 3 Investment 10,000 NPV ____________

Year 4 Income 40,000

Discount Rate 9% Go or No Go?

Solutions

Expert Solution

Here we first need to calculate PV of each cash flow.

PV of cash flow = cash flow x PV factor

Year

Cash Flow

PV Factor 9%

PV

1

25000

0.91743

$22,935.78

2

35000

0.84168

$29,458.80

3

-10000

0.77218

-$7,721.83

4

40000

0.70843

$28,337.01

$73,009.75

Net present value = PV of cash flows – initial investment

                                  = $73,009.75 - $75,000

                                 = $1,990.25

Profitability Index = PV of cash flows / Initial Investment

                                  = $73,009.75 / $75,000

                                  = 0.9735

Since the NPV is negative and PI is lower than 1, this project should be rejected.

jeff jeffy answered 1 year ago
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