Homework Answers
Solution:
| Computation of Profitability index | ||||||||
| Discount rate 10% | Discount rate 15% | Discount rate 22% | ||||||
| Particulars | Period | Amount | PV Factor | Present Value | PV Factor | Present Value | PV Factor | Present Value |
| Cash outflows: | ||||||||
| Initial investment | 0 | $14,000.00 | 1 | $14,000 | 1 | $14,000 | 1 | $14,000 |
| Present Value of Cash outflows (A) | $14,000 | $14,000 | $14,000 | |||||
| Cash Inflows | ||||||||
| Year 1 | 1 | $7,300.00 | 0.90909 | $6,636 | 0.86957 | $6,348 | 0.81967 | $5,984 |
| Year 2 | 2 | $6,900.00 | 0.82645 | $5,702 | 0.75614 | $5,217 | 0.67186 | $4,636 |
| Year 3 | 3 | $5,700.00 | 0.75131 | $4,282 | 0.65752 | $3,748 | 0.55071 | $3,139 |
| Present Value of Cash Inflows (B) | $16,621 | $15,313 | $13,758 | |||||
| Net Present Value (NPV) (B-A) | $2,621 | $1,313 | -$242 | |||||
| Profitability index (NPV / Initial investment) | 0.19 | 0.09 | -0.02 | |||||
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