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A project is projected to cost $2,000,000 to undertake.  It will generate positive cash inflows as follows:  Year...

A project is projected to cost $2,000,000 to undertake.  It will generate positive cash inflows as follows:  Year 1 - $400,000; Year 2 – 500,000; Year 3 - $650,000; Year 4 – 750,000; Year 5 – 800,000.  What is the project’s Profitability Index?

Select one:

a. 1.22

b. 1.20

c. 1.16

d. 1.14

e. 1.12

Solutions

Expert Solution

Option E is Correct
Year Cash Flows Discount factor at 10% Discounted Cash flows
1 $      400,000               0.909091 $    363,636.36
2 $      500,000               0.826446 $    413,223.14
3 $      650,000               0.751315 $    488,354.62
4 $      700,000               0.683013 $    478,109.42
5 $      800,000               0.620921 $    496,737.06
PV of Cash Inflow $ 2,240,060.60
Outflow $ 2,000,000.00
Profitability Index $1.12
Assume 10% Rate

ekkarill92 answered 2 years ago
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