A project is expected to provide cash flows of $10,950, $11,800, $14,900, and $9,400 over the...

A project is expected to provide cash flows of $10,950, $11,800, $14,900, and $9,400 over the next four years, respectively. At a required return of 9.2 percent, the project has a profitability index of 1.363. For this to be true, what is the project's cost at Time 0?

Multiple Choice

$27,862

$51,761

$25,540

Insufficient information.

$43,997

Expert Solution

Profitability Index (PI) is calculated as Present value of future cashflows divided by initial investment.

i) Initial Investment	Let it be x
ii) Sum of present value of future cashflows	37,975.93
PI (ii/i)	1.363

	Year	Cashflows	Discounting factor	present value
	1	10950	0.9157509	10,027.47
	2	11800	0.8385997	9,895.48
	3	14900	0.7679485	11,442.43
	4	9400	0.7032495	6,610.55
		Total		37,975.93

	1.363=	37975.93/x
	So x=	27,862.02

	So correct answer is option a i.e. $27862

jeff jeffy answered 2 years ago

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