Question 4) A project has an initial outlay of $4,705. It has a single payoff at the end of year 5 of $7,752. What is the profitability index (PI) of the project, if the company's cost of capital is 11.43 percent?

Round the answer to two decimal places.

Your Answer:

Profitability Index=0.96

Step-by-step explanation

Profitability Index(PI)

Profitability Index=Present Value of cash flows/Initial Investment cost

Present Value of cash flows=Future value x (1+r)^-n

Where;

• r= Cost of capital-11.43% or 0.1143
• n=period =5 years

Present Value of cash flows=$7,752 x (1.1143)^-5

Present Value of cash flows=$7,752 x 0.58209

Present Value of cash flows=$4,512.36

Profitability Index=$4,512.36/$4,705

Profitability Index=0.96