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Suppose a company has proposed a new 4-year project. The project has an initial outlay of...

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Finance

Suppose a company has proposed a new 4-year project. The projecthas an initial outlay of $17,000 and has expected cash flows of$8,000 in year 1, $9,000 in year 2, $10,000 in year 3, and $14,000in year 4. The required rate of return is 15% for projects at thiscompany. What is the profitability index for this project? (Answerto the nearest hundredth, e.g. 1.23)

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4.2 Ratings (548 Votes)

Ans 1.67

Year Project Cash Flows (i) DF@ 15% DF@ 15% (ii) PV of Project A ( (i) * (ii) )
1 8000 1/((1+15%)^1) 0.870                       6,956.52
2 9000 1/((1+15%)^2) 0.756                       6,805.29
3 10000 1/((1+15%)^3) 0.658                       6,575.16
4 14000 1/((1+15%)^4) 0.572                       8,004.55
NPV                     28,341.52
Total of PV of Cash Inflows 28341.52
Cash Outflows 17000
Profitability Index = 1.67
Present value of cash Inflow / Initial Investment (Cash Outflows) (28341.52 / 17000)

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Transcribed Image Text

Suppose a company has proposed a new 4-year project. The projecthas an initial outlay of $17,000 and has expected cash flows of$8,000 in year 1, $9,000 in year 2, $10,000 in year 3, and $14,000in year 4. The required rate of return is 15% for projects at thiscompany. What is the profitability index for this project? (Answerto the nearest hundredth, e.g. 1.23)

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