A project has an initial cost of $95,500, a life of 6 years, and equal annual cash inflows. The required return is 8.6 percent. According to the profitability index decision rule, what is the minimum annual cash flow necessary to accept the project?
| Minimum required cash inflow should be such amount, present value of which is equal to initial cost. | ||||||
| Required annual cash inflow | = | Initial Cost | / | Present Value of annuity of 1 | ||
| = | $ 95,500.00 | / | 4.539925 | |||
| = | $ 21,035.59 | |||||
| Working: | ||||||
| Present Value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | |||
| = | (1-(1+0.086)^-6)/0.086 | i | = | 8.60% | ||
| = | 4.53992512 | n | = | 6 | ||
| Alternatively, | ||||||
| Required annual cash inflow | =pmt(rate,nper,pv,fv) | Where, | ||||
| = $ 21,035.59 | rate | = | 8.60% | |||
| nper | = | 6 | ||||
| pv | = | $ -95,500.00 | ||||
| fv | = | 0 |
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