ABC Inc. is considering an investment of $1,583 million with after-tax cash inflows of $318 million per year for six years and an additional after-tax salvage value of 77 million in Year 6. The required rate of return is 18%. What is the investment’s Profitability Index (PI)?
Profitability Index = PV of inflows/Cash outflow
Cash outflow = $1,583 millions
$318 million per years for 6 years is a series of the annuity payment, so we can find its PV by PV of annuity formula and the additional cash inflow of $77 million in the sixth year, discount it back for 6 years at the rate of return.
Rate of return (r) = 18%
Periodic payment (P) =$318 million
Number of periods (n) = 6 years
Additional Cash inflow (C) = $77 million
Therefore,
PV of Inflow = $1140.7608 million (approximately)
Profitability Index = 1140.7608/1583 = 0.72
Get Answers For Free
Most questions answered within 1 hours.