Question

In: Finance

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.

Solutions

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)

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