Question

really need help, 3 decimal places please

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.52 million and create incremental cash flows of $597,672.00 each year for the next five years. The cost of capital is 11.54%. What is the profitability index for the J-Mix 2000? Submit

Answer 1

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,520,000 Indicate the initial cash flow by a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 11.54%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value is $659,253.32.

Profitability Index= $1,520,000 + $659,253.32/ $659,253.32

                                   = $2,179,253.32/ $659,253.32

                                   = 3.306.

In case of any query, kindly comment on the solution.