Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.73 million and create incremental cash flows of $593,243.00 each year for the next five years. The cost of capital is 9.18%. What is the profitability index for the J-Mix 2000? Answer Format: Number: Round to: 3 decimal places.

Answer 1

Cumulative P.V.F. formula = (1 - (1/(1+i)^n))/i
Calculation of Present value of cash outflows
Initial investment at Year 0					$   17,30,000.00
(present value shall be same at year 0)					______________
P.V. of cash outflows					$   17,30,000.00
					______________
Calculation of Present value of cash inflows
Annual free cash flow					593243
Cumulative P.V.F. @9.18% for 5 Years
(1-(1/(1+0.0918)^5))/0.0918					3.871552678
					______________
Present value of Annual cash flows					$   22,96,771.53
(593243 * 3.871553)					______________
Profitability index formula
P.I. = P.V. of cash inflows/P.V. of cash outflows
$ 22,96,771.53	/	$   17,30,000.00
1.327613599
So, Profitability index of project is 1.328.