Suppose a company has proposed a new 4-year project. The project has an initial outlay of...

Suppose a company has proposed a new 4-year project. The project has an initial outlay of $17,000 and has expected cash flows of $8,000 in year 1, $9,000 in year 2, $10,000 in year 3, and $14,000 in year 4. The required rate of return is 15% for projects at this company. What is the profitability index for this project? (Answer to the nearest hundredth, e.g. 1.23)

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Ans 1.67

Year	Project Cash Flows (i)	DF@ 15%	DF@ 15% (ii)	PV of Project A ( (i) * (ii) )

1	8000	1/((1+15%)^1)	0.870	6,956.52
2	9000	1/((1+15%)^2)	0.756	6,805.29
3	10000	1/((1+15%)^3)	0.658	6,575.16
4	14000	1/((1+15%)^4)	0.572	8,004.55
		NPV		28,341.52


	Total of PV of Cash Inflows			28341.52
	Cash Outflows			17000

	Profitability Index =			1.67
Present value of cash Inflow / Initial Investment (Cash Outflows)				(28341.52 / 17000)

jeff jeffy answered 8 months ago

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