Question

Irwin Industries is currently considering a project that will produce cash inflows of $8,000 a year for two years followed by $6,500 a year for three more years. The cost of the project is $26,000. What is the profitability index if the discount rate is 8%?

Answer 1

Ans 1.10

Year	Project Cash Flows (i)	DF@ 8%	DF@ 8% (ii)	PV of Project ( (i) * (ii) )
1	8000	1/((1+8%)^1)	0.926	7,407.41
2	8000	1/((1+8%)^2)	0.857	6,858.71
3	6500	1/((1+8%)^3)	0.794	5,159.91
4	6500	1/((1+8%)^4)	0.735	4,777.69
5	6500	1/((1+8%)^5)	0.681	4,423.79
		PV		28,627.51
	Total of PV of Cash Inflows			28627.51
	Cash Outflows			26000
	Profitability Index =			1.10
Present value of cash Inflow / Initial Investment (Cash Outflows)				(28627.51 / 26000)