MC Qu. 5-A1 What is the profitability index for an investment with the follow... What is...
MC Qu. 5-A1 What is the profitability index for an investment with the follow...
What is the profitability index for an investment with the following cash flows given a 8 percent required return?
| Year | Cash Flow |
| 0 | $-21,000 |
| 1 | $7,100 |
| 2 | $9,400 |
| 3 | $8,900 |
Homework Answers
Let Cash Flows in Year n be denoted by CFn
Given,
CF0 = -21000
CF1 = 7100
CF2 = 9400
CF3 = 8900
Interest Rate = r = 0.08
Net Present Value = PV = ΣCFn/(1+r)n
= -21000 + 7100/(1+0.08) + 9400/(1+0.08)2 +
8900/(1+0.08)3
= $698.17
Profitability Index = Present Value of Future Cash Flows / Initial Investment
= (NPV + Initial Investment) / Initial Investment
= (698.17 + 21000)/21000
= 1.033
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