You are offered an investment with returns of $ 2,757 in year 1, $ 4,958 in...

You are offered an investment with returns of $ 2,757 in year 1, $ 4,958 in year 2, and $ 4,839 in year 3. The investment will cost you $ 6,064 today. If the appropriate Cost of Capital (quoted interest rate) is 12.2 %, what is the Profitability Index of the investment? Enter your answer to the nearest .01. Do not use the $ sign or commas in your answer. If the NPV is negative, use the - sign.

Expert Solution

Ans 1.62

Year	Project Cash Flows (i)	DF@ 12.2%	DF@ 12.2% (ii)	PV of Project A ( (i) * (ii) )

1	2757	1/((1+12.2%)^1)	0.891	2,457.22
2	4958	1/((1+12.2%)^2)	0.794	3,938.41
3	4839	1/((1+12.2%)^3)	0.708	3,425.92
		TOTAL		9,821.55


	Total of PV of Cash Inflows			9821.55
	Cash Outflows			6064

	Profitability Index =			1.62
Present value of cash Inflow / Initial Investment (Cash Outflows)				(9821.55 / 6064)

jeff jeffy answered 1 year ago

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