Question

What is the profitability index (PI) of a project that has the following cash flows? The...

What is the profitability index (PI) of a project that has the following cash flows?

The required return is 12.0%.

Year Cash Flow

0 $ (14,000)

1 $ 3,000

2 $ 3,000

3 $ 3,000

4 $ 3,000

5 $ 3,000

6 $ 3,000

Group of answer choices

None of these are correct.

0.88

1.03

1.09

0.93

0 0
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Answer #1

Profitability Index = PV of cash flows/initial investment

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

=>

PI = [3000/1.12 + 3000/1.12^2 + 3000/1.12^3 + 3000/1.12^4 + 3000/1.12^5 + 3000/1.12^6]/14000

= 0.88

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