Question

Cash Flow -$9,400 3,100 5,800 5,100 a. What is the profitability index for the cash flows if the relevant discount rate is 11
b. What is the profitability index for the cash flows if the relevant discount rate is 18 percent? 1.053 1.084 1.105 1.000 1.
c. What is the profitability index for the cash flows if the relevant discount rate is 26 percent? 0.9226 0.949 0.968 0.876 0
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Answer #1

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=3100/1.11+5800/1.11^2+5100/1.11^3

=11229.279

PI=Present value of inflows/Present value of outflows

=11229.279/9400

=1.195(Approx).

b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=3100/1.18+5800/1.18^2+5100/1.18^3

=9896.60579

PI=Present value of inflows/Present value of outflows

=9896.60579/9400

=1.053(Approx).

c.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=3100/1.26+5800/1.26^2+5100/1.26^3

=8663.15133

PI=Present value of inflows/Present value of outflows

=8663.15133/9400

=0.922(Approx).

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