Question

Problem 10-04 Profitability Index A project has an initial cost of $62,950, expected net cash inflows of $9,000 per year for 8 years, and a cost of capital of 14%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places

Answer 1

Profitability Index = PV of Future Cash Flows / Initial Investment

= [$\sum_{i=1}^{8 }$$9,000 / (1.14)ⁱ] / $62,950

= [($9,000 / 1.14) + ($9,000 / 1.14²) + ($9,000 / 1.14³) + ($9,000 / 1.14⁴) +

($9,000 / 1.14⁵) + ($9,000 / 1.14⁶) + ($9,000 / 1.14⁷) + ($9,000 / 1.14⁸)] / $62,950

= [$7,894.74 + $6,925.21 + $6,074.74 + $5,328.72 + $4,674.32 + $4,100.28 +

$3,596.74 + $3,155.03] / $62,950

= $41,749.78 / $62,950 = 0.66