Question

Present Value of an Annuity of 1
Periods	8%	9%	10%
1	0.926	0.917	0.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487

A company has a minimum required rate of return of 10%. It is considering investing in a project that costs $80000 and is expected to generate cash inflows of $25000 at the end of each year for three years. The profitability index for this project is

1.27.

1.00.

0.78.

0.79.

Answer 1

Solution! 1-3 (A) () =(8) X(0) (C) (3) (A) → (R) Required Rate of Retum 10% OR 0:10 *(CF) Cash out How OR initial cost = $ 80000 (CA Cash inflow per year for 3 yearp = $25000 Demand of Question (PP) Profitability Index for this project = ? (1) Calculation of Prezent Values of cash Intow Year Cashin flow Present Value Annwiły factor Presenst value (10%, 3 years) (Given) (Civen) 1-3 $ 25000 a.487 $62,175 $62,175 Present value of cash in flow (@) Calculation of Present value & cashoutflow CA (B) (D)=(B)X(C) PVE Cashoutflow Present Value Year 107.3 year (Given) Cro 1.0000 $ 80000 PVAF $80000 $ 80000 Present value of cash outflow Present value factor (PVF] % We know that (Cashoutflow at years will be lo

СРТ) (A) Cakulation of profitability Index For this Project Present value of cash Pntrow PD) Present value of cashout How the values, РТ $62,175 [W.N-1] $ 00000 [W.N-2] Profitability Index Using the values, 0.7771875 Profitability Index (PT) = 0.70 option 'C'will be correct