Question

1. A project has an initial cost of $37,050, expected net cash inflows of $12,000 per year for 7 years, and a cost of capital of 13%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

2. A project has an initial cost of $49,700, expected net cash inflows of $11,000 per year for 8 years, and a cost of capital of 11%. What is the project's payback period? Round your answer to two decimal places.

Answer 1

1.Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$37,050. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 13%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $16,021.33.

Profitability Index= $37,050 +$16,021.33/ $37,050

                                   = $53,071.33/ $37,050

                                   = 1.4324 1.43.

2.Payback period=full years until recovery + unrecovered cost at the start of the year/cash flow during the year

                  = 4 years+ ($49,700 - $44,000)/ $11,000

                  = 4 years + $5,700/ $11,000

                  = 4 years + 0.5182

                  = 4.52 years

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