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Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and...

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.58 million and create incremental cash flows of $623,441.00 each year for the next five years. The cost of capital is 10.64%. What is the profitability index for the J-Mix 2000?

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Expert Solution

In order to calculate the profitability index, we need the following formula:

Profitability Index = Present value of Inflows / Present value of outflows

Thus, we need to calculate the present value of inflows as the present value of outflows is already given as $1.58 million ($1,580,000)

Incremental cash flows are $623,441 for next 5 years. The cost of capital is 10.64%. Present value of inflows:

So, now let's calculate the profitability index.

Profitability index of J-Mix 2000      

                                                    

Profitability Index for J-Mix 2000 is 1.47.

jeff jeffy answered 1 year ago
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