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Corporation projects cash flows of $14,500, $21,400, and $31,900 for Years 1 to 3 for a...

Corporation projects cash flows of $14,500, $21,400, and $31,900 for Years 1 to 3 for a project with an initial cost of $45,000. What is the profitability index given an assigned discount rate of 12 percent?

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Expert Solution

Cash Flows:
Year 0 = -$45,000
Year 1 = $14,500
Year 2 = $21,400
Year 3 = $31,900

Discount Rate = 12%

Present Value of Cash Inflows = $14,500/1.12 + $21,400/1.12^2 + $31,900/1.12^3
Present Value of Cash Inflows = $52,712.1675

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $52,712.1675 / $45,000
Profitability Index = 1.17

jeff jeffy answered 2 years ago
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