Question

What is the profitability index for a project that has an initial cost of $7,700 and cash inflows of $850, $400, $3,300, and $7,100 over the next four years, respectively, if the required rate of return is 15%. 1.055 0.894 1.944 0.944 0.055

Answer 1

Profitability Index = Present value of cash flow to be generated in future / Initial Investment

If,

Profitability Index > 1: Project will generate the value for the company

Profitability Index = 1: Project will neither generate value nor destroy

Profitability Index < 1: Project will destroy the value of the company

Profitability Index = 0.944 Answer (4th option)

A C 15% D 1 Required rate of return 00u WN Year Cashflows PV 0 $ (7,700.00) 11 $ 850.00 $ 739.13 =B5/(1+$C$1)^A5 21 $ 400.00 $ 302.46 =B6/(1+$C$1)^A6 3 $ 3,300.00 $2,169.80 =B7/(1+$C$1)^AZ 4 $ 7,100.00 $4,059.45 =B8/(1+$C$1)^A8 9 Present Value of cashflow $7,270.84 =SUM(C5:08) 10 10 Initial Investment Initiali $7,700.00 11 Profitability Index 0.9442649 =C9/C10 12

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