Question

In: Finance

Given the discount rate and the future cash flow of each project listed in the following​...

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 U Project V
Year 0 -$2,000,000 -$2,300,000
Year 1 $500,000 $1,150,000
Year 2 $500,000 $950,000
Year 3 $500,000 $750,000
Year 4 $500,000 $550,000
Year 5 $500,000 $350,000
Discount rate 5% 15%

What is the PI of project​ U?

​(Round to two decimal​ places.)

Solutions

Expert Solution

We know that Proftability Index = PV of future cashflow/ Initial Outlay

Project U:

Initial Outlay = 2000000

PV of Future Cashflow = 2164738.34

Proftability Index = 2164738.34 / 2000000

= 1.082

Project V:

Initial Outlay = 2300000

PV of Future Cashflow = 2699949.81

Proftability Index = 2699949.80/ 2300000

= 1.174

As profitability Index of project V is more than Project U, company should accept Project V.

jeff jeffy answered 1 year ago
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