Compute the Pl statistic for Project Z if the appropriate cost of capital is 6 percent....

Question

Question

Compute the Pl statistic for Project Z if the appropriate cost of capital is 6 percent. (Do not round intermediate calculatio

Answer 1

Answer #1

Profitability Index of a portfolio is calculated using formula

PI = PV of future cash flows/initial investment

So, here, PV of future cash flows at cost of capital r = 6% is

PV = CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4 + CF5/(1+r)^5

=> PV = 390/1.06 + 520/1.06^2 + 690/1.06^3 + 340/1.06^4 + 140/1.06^5

=> PV = $1783.99

So, Profitability index = 1783.99/1200 = 1.49

Answer 2

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