Question

Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, , use the Pl to determine which projects the company should accept. What is the Pl of project A? Data Table (Round to two decimal places.) (Click on the following icon in order to copy its contents into a spreadsheet.) Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Discount rate Project A - $2,200,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 4% Project B - $2,300,000 $1,150,000 $1,050,000 $950,000 $850,000 $750,000 16%

Answer 1

Ans PI of Project A is 1.77

Year	Project Cash Flows (i)	DF@ 4%	DF@ 4% (ii)	PV of Project ( (i) * (ii) )
1	700000	1/((1+4%)^1)	0.962	6,73,076.92
2	800000	1/((1+4%)^2)	0.925	7,39,644.97
3	900000	1/((1+4%)^3)	0.889	8,00,096.72
4	1000000	1/((1+4%)^4)	0.855	8,54,804.19
5	1000000	1/((1+4%)^5)	0.822	8,21,927.11
		PV		38,89,549.91
	Total of PV of Cash Inflows			3889549.91
	Cash Outflows			2200000
	Profitability Index =			1.77
Present value of cash Inflow / Initial Investment (Cash Outflows)				(3889549.91 / 2200000)