Question

Gamma Enterprises, Inc. has a WACC of 12.25% and is considering a project that requires a cash outlay of $1,895 now with cash inflows of $975 at the end of year 1, $650 at the end of year 2, $850 at the end of year 3, and $925 at the end of year 4. What is the project's profitability index? Note: Enter your answer rounded off to four decimal places since profitability index is usually shown as a number not as a percentage. Do not enter % in the answer box. For example, if your answer is 1.23456 or 123.456% then enter as 1.2346 in the answer box.

Answer 1

Project M
Discount rate	0.1225
Year	0	1	2	3	4
Cash flow stream	-1895	975	650	850	925
Discounting factor	1	1.1225	1.260006	1.414357	1.5876158
Discounted cash flows project	-1895	868.5969	515.8705	600.9798	582.63468
NPV = Sum of discounted cash flows
NPV Project M =	673.08
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(673.08+1895)/1895
1.3552