Question

P9-20 (similar to) Question Help Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, use the PI to determine which projects the company should accept. What is the Pl of project A? (Round to two decimal places.) i Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) Cash Flow Year o Year 1 Year 2 Year 3 Year 4 Year 5 Discount rate Project -$2.200.000 $300,000 $500.000 $700,000 $900.000 $1,100,000 8% Project B -$2,500,000 $1,250,000 $1,050,000 S850,000 S650,000 S450,000 15% Print Done

Answer 1

Ans Project A PI: 1.21

Accept, since PI > 1

PROJECT A
Year	Project Cash Flows (i)	DF@ 8%	DF@ 8% (ii)	PV of Project ( (i) * (ii) )
1	300000	1/((1+8%)^1)	0.926	2,77,777.78
2	500000	1/((1+8%)^2)	0.857	4,28,669.41
3	700000	1/((1+8%)^3)	0.794	5,55,682.57
4	900000	1/((1+8%)^4)	0.735	6,61,526.87
5	1100000	1/((1+8%)^4)	0.681	7,48,641.52
		PV		26,72,298.14
	Total of PV of Cash Inflows			2672298.14
	Cash Outflows			2200000
	Profitability Index = 2672298.14 / 2200000			1.21

Ans Project B PI: 1.21

Accept, since PI > 1

PROJECT B
Year	Project Cash Flows (i)	DF@ 15%	DF@ 15% (ii)	PV of Project ( (i) * (ii) )
1	1250000	1/((1+15%)^1)	0.870	10,86,956.52
2	1050000	1/((1+15%)^2)	0.756	7,93,950.85
3	850000	1/((1+15%)^3)	0.658	5,58,888.80
4	650000	1/((1+15%)^4)	0.572	3,71,639.61
5	450000	1/((1+15%)^4)	0.497	2,23,729.53
		PV		30,35,165.31
	Total of PV of Cash Inflows			3035165.31
	Cash Outflows			2500000
	Profitability Index = 3035165.31 / 2500000			1.21