Question

Given the discount rate and the future cash flow of each project listed in the following​ table, use the PI to determine which projects the company should accept.

Cash Flow	Project A		Project B
Year 0	−​$2,000,000		-$2,600,000
Year 1	​$200,000		​$1,300,000
Year 2	​$400,000		​$1,100,000
Year 3	​$600,000		​$900,000
Year 4	​$800,000		​$700,000
Year 5	​$1,000,000		​$500,000
Discount rate	8​%		15​%

a) What is the PI of project A?

b) What is the PI of project B?

Answer 1

Ans a) What is the PI of project A?            1.14

	Year	Project Cash Flows (i)	DF@ 8%	DF@ 8% (ii)	PV of Project A ( (i) * (ii) )
	1	200000	1/((1+8%)^1)	0.926	1,85,185.19
	2	400000	1/((1+8%)^2)	0.857	3,42,935.53
	3	600000	1/((1+8%)^3)	0.794	4,76,299.34
	4	800000	1/((1+8%)^4)	0.735	5,88,023.88
	5	1000000	1/((1+8%)^5)	0.681	6,80,583.20
			TOTAL CASH INFLOW		22,73,027.14
		Total of PV of Cash Inflows		2273027.14
		Cash Outflows		2000000
		Profitability Index =		1.14
Present value of cash Inflow / Initial Investment (Cash Outflows)				(2273027/2000000)

b) What is the PI of project B? 1.23

	Year	Project Cash Flows (i)	DF@ 15%	DF@ 15% (ii)	PV of Project A ( (i) * (ii) )
	1	1300000	1/((1+15%)^1)	0.870	11,30,434.78
	2	1100000	1/((1+15%)^2)	0.756	8,31,758.03
	3	900000	1/((1+15%)^3)	0.658	5,91,764.61
	4	700000	1/((1+15%)^4)	0.572	4,00,227.27
	5	500000	1/((1+15%)^5)	0.497	2,48,588.37
			TOTAL CASH INFLOW		32,02,773.07
		Total of PV of Cash Inflows		3202773.07
		Cash Outflows		2600000
		Profitability Index =		1.23
Present value of cash Inflow / Initial Investment (Cash Outflows)				(3202773/2600000)