You are offered an investment with returns of $ 2,847 in year 1, $ 4,914 in...

You are offered an investment with returns of $ 2,847 in year 1, $ 4,914 in year 2, and $ 3,048 in year 3. The investment will cost you $ 7,014 today. If the appropriate Cost of Capital (quoted interest rate) is 9.1 %, 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 = 1.30

Year	Project Cash Flows (i)	DF@ 9.1%	DF@ 9.1% (ii)	PV of Project A ( (i) * (ii) )

1	2847	1/((1+9.1%)^1)	0.917	2,609.53
2	4914	1/((1+9.1%)^2)	0.840	4,128.44
3	3048	1/((1+9.1%)^3)	0.770	2,347.15
		PV		9,085.12


	Total of PV of Cash Inflows			9085.12
	Cash Outflows			7014

	Profitability Index =			1.30
Present value of cash Inflow / Initial Investment (Cash Outflows)				(9085.12 / 7014)

jeff jeffy answered 1 year ago

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