Question

Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of capital is 5.18 percent. What is the PI of a project if the initial costs are $2,290,428 and the project life is estimated as 10 years? The project will produce the same after-tax cash inflows of $534,517 per year at the end of the year.

Answer 1

PI = PV of future cash flows/initial investment

Present value of annuity= payment per period * [1-(1+i)^-n]/i  

i = interest rate per period

n = number of periods

=>

PI = [534517 * [1-(1+0.0518)^-10]/0.0518]/2290428

= 1.786