Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.93 million and create incremental cash flows of $537,571.00 each year for the next five years. The cost of capital is 11.64%. What is the profitability index for the J-Mix 2000?

Answer 1

Machine Cost = $1,930,000

Incremental Cash flows = $537,571

Period 5 years

Present value of cash inflows = $537,571 * PVAF(11.64% , 5 years)

Present value of cash inflows = $537,571 *3.6371579

Present value of cash inflows = $1,955,230.63

Profitability Index = Present value of cash inflows / Initial Investment

Profitability Index = $1,955,230.63 / $1,930,000

Profitability Index = 1.013

So, the Profitability Index for J-Mix 2000 is 1.013