Question

Evaluate this project using a profitability index, if a market interest rate is 8%.

Year Cash flow

0 (100,000)

1 55,000

2 69,000

3 22,000

Answer 1

Year	Cash Flows	PVF=1/(1+r)^n	Present Values(Cash Flows*PVF)
0	-100,000	1.0000
1	55,000	0.9259	50925.93
2	69,000	0.8573	59156.38
3	22,000	0.7938	17464.31
		Total	127546.61

Profitability Index=PV for future cash flows/Initial Investment=127546.61/100000=1.2754661

Since, PI is greater than 1 we can undertake the project as calculations greater than 1.0 indicate the future anticipated discounted cash inflows of the project are greater than the anticipated discounted cash outflows.

If helpful, Thumbs UP please:)