Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.97 million and create incremental cash flows of $504,235.00 each year for the next five years. The cost of capital is 8.73%. What is the profitability index for the J-Mix 2000?
Profitability index = Present value / Initial investment
Present value = Annuity * [1 - 1 / (1 + r)n] / r
Present value = 504,235 * [1 - 1 / (1 + 0.0873)5] / 0.0873
Present value = 504,235 * [1 - 1/1.519662] / 0.0873
Present value = 504,235 * [1 - 0.65804] / 0.0873
Present value = 504,235 * 3.91707
Present value = 1,975,115.87
Profitability index = 1,975,115.87 / 1,970,000
Profitability index = 1.00
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