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A project has cash flows of -$125,500, $60,800, $62,300 and $75,000 for years 0 to 3,...

A project has cash flows of -$125,500, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 10.0 percent. What is the profitability index?  DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ENTER YOUR ANSWER TO TWO DECIMAL PLACES (e.g. 25.75).

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Answer #1

The profitability index is computed as shown below:

= Present value of future cash flows / Initial investment

Present value of future cash flows is computed as follows:

= Future value / (1 + r)n

= $ 60,800 / 1.10 + $ 62,300 / 1.102 + $ 75,000 / 1.103

= $ 163,108.9406

So, the profitability index will be:

= $ 163,108.9406 / $ 125,500

= 1.30 Approximately

Feel free to ask in case of any query relating to this question

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