Required : |
(a) | What is the profitability index for the cashflows if the relevant discount rate is 10 percent? |
(b) | What is the profitability index for the cashflows if the relevant discount rate is 14 percent? |
(c) | What is the profitability index for the cashflows if the relevant discount rate is 22 percent? |
Year | Cash Flow |
0 | −$8,400 |
1 | 3,000 |
2 | 5,000 |
3 | 4,000 |
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
At 10%:
Present value of inflows=3000/1.1+5000/1.1^2+4000/1.1^3
=$9864.763336
PI=Present value of inflows/Present value of outflows
=$9864.763336/$8400
=1.17(Approx)
At 14%:
Present value of inflows=3000/1.14+5000/1.14^2+4000/1.14^3
=$9178.802655
PI=Present value of inflows/Present value of outflows
=$9178.802655/$8400
=1.09(Approx)
At 22%:
Present value of inflows=3000/1.22+5000/1.22^2+4000/1.22^3
=$8021.155956
PI=Present value of inflows/Present value of outflows
=$8021.155956/$8400
=0.95(Approx).
Required : (a) What is the profitability index for the cashflows if the relevant discount...
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