You are offered an investment with returns of $ 1,752 in year 1, $ 4,823 in...

You are offered an investment with returns of $ 1,752 in year 1, $ 4,823 in year 2, and $ 5,748 in year 3. The investment will cost you $ 6,757 today. If the appropriate Cost of Capital (quoted interest rate) is 7.9 %, what is the Profitability Index of the investment? Enter your answer to the nearest .01. Do not use the $ sign or commas in your answer. If the NPV is negative, use the - sign.

Expert Solution

Ans Profitability Index of the investment = 1.53

Year	Project Cash Flows (i)	DF@ 7.9%	DF@ 7.9% (ii)	PV of Project A ( (i) * (ii) )

1	1752	1/((1+7.9%)^1)	0.927	1,623.73
2	4823	1/((1+7.9%)^2)	0.859	4,142.61
3	5748	1/((1+7.9%)^3)	0.796	4,575.65
		PV		10,341.98


	Total of PV of Cash Inflows			10341.98
	Cash Outflows			6757

	Profitability Index =			1.53
Present value of cash Inflow / Initial Investment (Cash Outflows)				(10341.98/ 6757)

jeff jeffy answered 1 year ago

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