Question

Year	Cash Flow
0	−$7,400
1	2,100
2	2,100
3	5,000

  

a. What is the profitability index for the cash flows if the relevant discount rate is 6 percent?

  

b. What is the profitability index for the cash flows if the relevant discount rate is 16 percent?

  

c. What is the profitability index for the cash flows if the relevant discount rate is 23 percent?

Answer 1

year cash flows $7,400 $2,100 $2,100 $5,000 pv @ 6% 1.0000 0.9434 0.8900 0.8396 NPV pv @ 16% 1.0000 0.8621 0.7432 0.6407 pv @ 23% 1.0000 0.8130 0.6610 0.5374 present value at 6% rate present value at 16% rate present value at 23% rate $7,400 -$7,400 $7,400 $1,981 $1,810 $1,707 $1,869 $1,561 $1,388 $4,198 $3,203 $2,687 $648.22 -$825.72 $1,617.70 a. profitability index = 1+ (NPV/Initial cost) 1.088 at 6 percent b. profitability index = 1+ (NPV/Initial cost) 0.888 at 16 percent c. profitability index = 1+ (NPV/Initial cost) 0.781 at 23 percent