What is the profitability index of a project that costs $8,000 and provides cash flows of...

What is the profitability index of a project that costs $8,000 and provides cash flows of $2,100 in years 1 and 2 and $4,100 in years 3 and 4? The discount rate is 10%. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Solutions

Expert Solution

Profitability index is calculated using the below formula:

Profitability Index= Net present value + Initial investment/ Initial investment

Net present value is calculated using a financial calculator by inputting the below:

Press the CF button.
CF0= -$8,000. It is entered with a negative sign since it is a cash outflow.
Cash flow for each year should be entered.
Press Enter and down arrow after inputting each cash flow.
After entering the third cash flow cash flow, press the NPV button and enter the discount rate of 10%.
Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $1,525.37.

Profitability Index= $1,525.37 + $8,000/ $8,000

= $9,525.37/ $8,000

= 1.1907.

In case of any query, kindly comment on the solution

jeff jeffy answered 11 months ago

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