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Consider the following project being analyzed for possible investment at ABC Corp. Initial Cost –$50 Inflow...

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Finance

Consider the following project being analyzed for possibleinvestment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 InflowYear 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10All amounts are in millions. The required return for the project is8%. The project’s profitability index is: (Enter your answer out totwo decimal places. As an example, you would enter 1.50 as1.50)

Answer & Explanation Solved by verified expert
3.6 Ratings (495 Votes)

The project profitability index is 1.14
Working:
Calculation of present value of cash inflows:
Year Cash inflow Discount factor Present value of cash inflows
a b c=1.08^-a d=b*c
1 $    15.00 0.925926 $    13.89
2 $    15.00 0.857339 $    12.86
3 $    20.00 0.793832 $    15.88
4 $    10.00 0.73503 $       7.35
5 $    10.00 0.680583 $       6.81
Total $    56.78
Calculation of profitability index:
Profitability index = Present value of cash inflows / Initial cost of the project
= $    56.78 / $    50.00
=           1.14

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Consider the following project being analyzed for possibleinvestment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 InflowYear 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10All amounts are in millions. The required return for the project is8%. The project’s profitability index is: (Enter your answer out totwo decimal places. As an example, you would enter 1.50 as1.50)

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