Find the profitability index (PI) for the following series of future cash flows, assuming the company’s cost of capital is 5.85 percent. The initial outlay is $433,170.
Year 1: $125,765
Year 2: $143,932
Year 3: $137,788
Year 4: $122,491
Year 5: $175,959
Year | Cash Flow | PV Factor at 5.85% | PV Of Cash Flow at 5.85% | |
1 | $ 1,25,765 | 0.944733 | $ 1,18,814.36 | |
2 | $ 1,43,932 | 0.892521 | $ 1,28,462.28 | |
3 | $ 1,37,788 | 0.843194 | $ 1,16,181.99 | |
4 | $ 1,22,491 | 0.796593 | $ 97,575.49 | |
5 | 1,75,959 | 0.752568 | $ 1,32,421.09 | |
PV Of Cash Inflow | $ 4,61,034.12 | |||
Profitability index = Present value of cash inflow / initial investment | ||||
=$461034.12/433170 | ||||
=1.06 times or | 1.06433 | |||
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