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A project has an initial cost of $69,125, expected net cash inflows of $15,000 per year...

A project has an initial cost of $69,125, expected net cash inflows of $15,000 per year for 8 years, and a cost of capital of 12%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

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Answer #1

Profitability Index(PI) =Present value of expected cash flows (PV) / initial cost of a project (CF0).

Cost of Capital = 12% = 0.12

Now first we calculate PV of cash inflows.

PV = N=01 ? ( CF t / (1 + cost of capital) t )

Putting values in this formula, we have

=15000/( ( 1 + 0.12) 1) + 15000/ ( (1 + 0.12)2)+15000/((1 + 0.12)3) + 15000/((1 + 0.12) 4) + 15000/((1 + 0.12) 5) + 15000/((1 + 0.12) 6 )+15000/((1 + 0.12) 7) + 15000/((1 + 0.12) 8)

= $ 74514.5965

Initial Cost = $ 69125

Profitability Index PI = $ 74514.5965 / $ 69125 = 1.0779

PI = 1.08

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