Year Cash Flow 0 −$8,600 1 4,400 2 4,700 3 4,000 a. What is the profitability...

Year Cash Flow 0 −$8,600 1 4,400 2 4,700 3 4,000

a. What is the profitability index for the cash flows if the relevant discount rate is 7 percent?

b. What is the profitability index for the cash flows if the relevant discount rate is 15 percent?

c. What is the profitability index for the cash flows if the relevant discount rate is 22 percent?

Expert Solution

Ans a) 1.34


Year		Project (i)	DF@ 7% (ii)	PV of Project A ( (i) * (ii) )
1		4400	0.935	4112.15
2		4700	0.873	4105.16
3		4000	0.816	3265.19
		NPV		11482.50

		Total of PV of Cash Inflows		11482.50
		Cash Outflows		8600

		Profitability Index =		1.34
	Present value of cash Inflow / Initial Investment (Cash Outflows)

Ans b) 1.16

Year		Project (i)	DF@ 15% (ii)	PV of Project A ( (i) * (ii) )
1		4400	0.870	3826.09
2		4700	0.756	3553.88
3		4000	0.658	2630.06
		NPV		10010.03

		Total of PV of Cash Inflows		10010.03
		Cash Outflows		8600

		Profitability Index =		1.16
	Present value of cash Inflow / Initial Investment (Cash Outflows)

Ans c) 1.04

Year		Project (i)	DF@ 22% (ii)	PV of Project A ( (i) * (ii) )
1		4400	0.820	3606.56
2		4700	0.672	3157.75
3		4000	0.551	2202.83
		NPV		8967.14

		Total of PV of Cash Inflows		8967.14
		Cash Outflows		8600

		Profitability Index =		1.04
	Present value of cash Inflow / Initial Investment (Cash Outflows)

jeff jeffy answered 1 year ago

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