ABC Company is considering an investment of $1196 million with after-tax cash inflows of $289 million...
ABC Company is considering an investment of $1196 million with after-tax cash inflows of $289 million per year for six years and an additional after-tax salvage value of 190 million in Year 6. The required rate of return is 14%. What is the investment’s Profitability Index (PI)?
Homework Answers
| Year | Annual Cash flows | PV factor @14% | PV of cash inflows |
| 1 - 6 | 289 | 3.88867 | 1123.83 |
| 6 | 190 | 0.45559 | 86.56 |
| Total PV of cash flows | 1210.39 | ||
| Profitability Index = PV of cash inflows / Initial investment | |||
| Profitability Index = 1210.39 million / 1196 million | |||
| Profitability Index = 1.012 | |||
PV factors taken from PV table.
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