Question

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

Answer 1

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.