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The following projects are under consideration by Smith's Food Markets, Inc. Smith's requires a 14% rate...

The following projects are under consideration by Smith's Food Markets, Inc. Smith's requires a 14% rate of return on projects of this nature.

Project A: CF0 = -$90,000; CF1-CF6 = +$25,000

Project B: CF0 = -$200,000; CF1-CF3 = +$90,000

What is the Profitability Index of project A?

Group of answer choices

1.08

1.35

1.50

1.67

1.04

Solutions

Expert Solution

Ans 1.08

Year Project Cash Flows (i) DF@ 14% DF@ 14% (ii) PV of Project ( (i) * (ii) )
1 25000 1/((1+14%)^1) 0.877193                             21,929.82
2 25000 1/((1+14%)^2) 0.769468                             19,236.69
3 25000 1/((1+14%)^3) 0.674972                             16,874.29
4 25000 1/((1+14%)^4) 0.592080                             14,802.01
5 25000 1/((1+14%)^5) 0.519369                             12,984.22
6 25000 1/((1+14%)^6) 0.455587                             11,389.66
PV                             97,216.69
Total of PV of Cash Inflows 97216.69
Cash Outflows 90000
Profitability Index = 1.08
Present value of cash Inflow / Initial Investment (Cash Outflows) (97216.69 / 90000)

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