Question

POD has a project with the following cash flows:

Year	Cash Flows
0	−$271,000
1	146,000
2	163,500
3	128,600

The required return is 8.8 percent. What is the profitability index for this project?

Answer 1

let us know the present value of future cash flows:

year	cash flow	present value factor	cash flow * present value factor
1	146,000	1/(1.088)^1=>0.91912	134,191.52
2	163,500	1/(1.088)^2=>0.84478	138,121.53
3	128,600	1/(1.088)^3=>0.77645	99,851.43
		Total present value of cash inflows	372,164.48

Profitability index = present value of cash inflows / initial outlay

=>372,164.48 / 271,000

=>1.373.