In: Finance
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
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) |