question archive A project with an initial cost of $32,000 is expected to provide cash flows of $12,900, $13,100, $16,200, and $10,700 over the next four years, respectively
A project with an initial cost of $32,000 is expected to provide cash flows of $12,900, $13,100, $16,200, and $10,700 over the next four years, respectively
Subject:FinancePrice:2.87 Bought7
A project with an initial cost of $32,000 is expected to provide cash flows of $12,900, $13,100, $16,200, and $10,700 over the next four years, respectively. If the required return is 8.1 percent, what is the project's profitability index?
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Answer:
The profitability index = Present Value of Cash Inflows / Present Value of Cash Outflows
= [ $ 12,900 * 1/(1.081) ^ 1 + $ 13,100 * 1/(1.081) ^ 2 + $ 16,200* 1/(1.081) ^ 3 +$ 10,700* 1/(1.081) ^ 4 ] / $ 32,000
= $ 43,803.95 / $ 32,000
= 1.368873438
Hence the correct answer is 1.37
