Question

The company has a project with a 5-year life, an initial investment of $220,000, and is expected to yield annual cash flows of $55,500. What is the present value index of the project if the required rate of return is set at 8%?

present value index= ___?________________=?

   ?

Answer 1

Present Value Index = 1.01

Calculation:

Year	Formula	Amount
Year 0 i.e. Initial Investment		-2,20,000.00
Year 1 (NPV)	Cash Flow / (1+rate)^n = 55500 / (1+0.08)^1 = 55500 / (1.08)^1	51,388.89
Year 2 (NPV)	Cash Flow / (1+rate)^n = 55500 / (1+0.08)^2 = 55500 / (1.08)^2	47,582.30
Year 3 (NPV)	Cash Flow / (1+rate)^n = 55500 / (1+0.08)^3 = 55500 / (1.08)^3	44,057.69
Year 4 (NPV)	Cash Flow / (1+rate)^n = 55500 / (1+0.08)^4 = 55500 / (1.08)^4	40,794.16
Year 5 (NPV)	Cash Flow / (1+rate)^n = 55500 / (1+0.08)^5 = 55500 / (1.08)^5	37,772.37
Total Cash Inflow from Investment = NPV for 5 years	2,21,595.41

Now, Since, Present Value Index = Present Value of Future Cash Flows / Initial Investment

= $2,21,595.41 / $2,20,000

= 1.01