Question

year cash flow

0... -8,200

1... 5,800

2... 5,300

3... 4,300

what is the profitability index for the cash flows if the relevant discount rate is 12%?

what about at 20%?

Answer 1

Profitability Index = Present value of cash inflows/Initial Investment

At 12%, PI = [5,800*PVF(12%, 1 year) + 5,300*PVF(12%, 2 years)+ 4,300*PVF(12%, 3 years)]/8,200

= [5,000*0.893 + 5,300*0.797 + 4,300*0.712]/8,200

= 1.4330

At 20%, PI =

[5,000*0.833 + 5,300*0.694 + 4,300*0.579]/8,200

= 1.2601