Question
In: Finance
Consider the following cash flows: Year Cash Flow 0 $-28,400 1 15,300 2...
| Consider the following cash flows: |
| Year | Cash Flow |
| 0 | $-28,400 |
| 1 | 15,300 |
| 2 | 13,600 |
| 3 | 10,000 |
| Requirement 1: |
|
What is the profitability index for the above set of cash flows if the relevant discount rate is 8 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) |
| Profitability index |
|
| Requirement 2: |
|
What is the profitability index if the discount rate is 13 percent? (Do not round intermediate calculations.Round your answer to 3 decimal places (e.g., 32.161).) |
| Profitability index |
|
| Requirement 3: |
|
What is the profitability index if the discount rate is 22 percent? (Do not round intermediate calculations.Round your answer to 3 decimal places (e.g., 32.161).) |
| Profitability index |
|
Solutions
Expert Solution
Profitability Index= PV of future cash flows/Initial investment
Project A
PV of future cash flows is calculated using a financial calculator by inputting the below:
- Press the CF button.
- CF0= -$28,400
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 8%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
The present value of cash flows is $5,364.50.
Profitability Index= $5,364.50/ $28,400 = 0.19
Project B
PV of future cash flows is calculated using a financial calculator by inputting the below:
- Press the CF button.
- CF0= -$28,400
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 13%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
The present value of cash flows is $2,721.12.
Profitability Index= $2,721.12/ $28,400 = 0.0958 0.10.
Project C
PV of future cash flows is calculated using a financial calculator by inputting the below:
- Press the CF button.
- CF0= -$28,400
- Cash flow for each year should be entered.
- Press Enter and down arrow after inputting each cash flow.
- After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 22%.
- Press enter after that. Press the down arrow and CPT buttons to get the net present value.
The present value of cash flows is -$1,21.62.
Profitability Index= -$1,21.62/ $28,400 = -0.04.
In case of any query, kindly comment on the solution.
jeff jeffy answered 2 years agoRelated Solutions
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