What is the profitability index for an investment with the following cash flows given a 10 percent required return?
Year | Cash Flow |
0 | $-33,000 |
1 | $13,700 |
2 | $16,000 |
3 | $15,400 |
Note: Please explain how the present value factor is calculated.
Present value = 13,700 / (1 + 0.1)1 + 16,000 / (1 + 0.1)2 + 15,400 / (1 + 0.1)3
Present value = 13,700 / 1.1 + 16,000 / 1.21 + 15,400 / 1.331
Present value = 12,454.5455 + 13,223.1405 + 11,570.2479
Present value = $37,247.9339
Profitability index = Present value / initial investment
Profitability index = 37,247.9339 / 33,000
Profitability index = 1.13
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