Question

Consider the following cash flows: Year Cash Flow -$29,500 14,200 14,700 11,100 2 3 a. What is the profitability index for the cash flows if the relevant disCount rate is 10 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) b. What is the profitability index if the discount rate is 15 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) c. What is the profitability index if the discount rate is 22 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) Profitability index b. Profitability index а. Profitability index C.

Answer 1

PI = PV of future cash flows/initial investment

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

=>

a)

PI = (14200/1.1 + 14700/1.1^2 + 11100/1.1^3)/29500

= 1.132

b)

PI = (14200/1.15 + 14700/1.15^2 + 11100/1.15^3)/29500

= 1.043

c)

PI = (14200/1.22 + 14700/1.22^2 + 11100/1.22^3)/29500

= 0.937