Question

Year	Cash Flows
0	-17189
1	11331
2	9978
3	6764

What is the profitability index for the set of cash flows if the relevant discount rate is 9 percent? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161))

Year	Cash Flows
0	-68683
1	30297
2	31668
3	30408

What is the profitability index for the set of cash flows if the relevant discount rate is 10 percent? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161))

Answer 1

Discount rate	9.000%
Year	0	1	2	3
Cash flow stream	-17189	11331	9978	6764
Discounting factor	1.000	1.090	1.188	1.295
Discounted cash flows project	-17189.000	10395.413	8398.283	5223.049
NPV = Sum of discounted cash flows
NPV 0 =	6827.74
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(6827.74+17189)/17189
1.4

Discount rate	10.000%
Year	0	1	2	3
Cash flow stream	-68683	30297	31668	30408
Discounting factor	1.000	1.100	1.210	1.331
Discounted cash flows project	-68683.000	27542.727	26171.901	22845.980
NPV = Sum of discounted cash flows
NPV 0 =	7877.61
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(7877.61+68683)/68683
1.11