Year
Cash Flow
0
–$
18,000
1
10,300
2
9,200
3
5,700
What is the profitability index for the set of cash flows if the relevant discount rate is 10 percent?
What is the profitability index for the set of cash flows if the relevant discount rate is 15 percent?
What is the profitability index for the set of cash flows if the relevant discount rate is 22 percent?
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
1.Present value of inflows=10300/1.1+9200/1.1^2+5700/1.1^3
=$21249.44
PI=Present value of inflows/Present value of outflows
=$21249.44/$18000
=1.18
2.Present value of inflows=10300/1.15+9200/1.15^2+5700/1.15^3
=$19660.886
PI=Present value of inflows/Present value of outflows
=$19660.886/$18000
=1.09
3.Present value of inflows=10300/1.22+9200/1.22^2+5700/1.22^3
=$17762.79
PI=Present value of inflows/Present value of outflows
=$17762.79/$18000
=0.99(Approx)
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