Question
In: Finance
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)
Solutions
Expert Solution
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) | |||
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