Question

7. Calculating Profitability Index store expects aftertax cash inflows of $59,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 13 percent. What is the project's PI? Should it be accepted? Bill plans to open a self-serve grooming center in a front. The grooming equipment will cost $265,000, to be paid immediately. Bill

Answer 1

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Profitability index = Present value of cash flow / Initial investment
Intial investment =		265000
Computation of present value of cash flow
	i	ii	iii=i*ii
Year	Cash flow	PVIF @ 13%	Present value
1	59000	0.8850	52212.39
2	59000	0.7831	46205.65
3	59000	0.6931	40889.96
4	59000	0.6133	36185.8
5	59000	0.5428	32022.84
6	59000	0.4803	28338.79
7	59000	0.4251	25078.58
Present value =			260934
Therefore PI =		=260934/265000		0.984657
Since PI is less than 1 project should not be accepted.