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What is the Profitability Index (PI) of this project if the required rate is 18%? Year...

What is the Profitability Index (PI) of this project if the required rate is 18%? Year CF 0 -$2889 1 $1252 2 $1110 3 $1445 4 $506 5 $925

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Answer #1

Profitability Index (PI)

Year

Annual Cash Inflow ($)

Present Value Factor at 18%

Present Value of Annual Cash Inflow ($)

1

1,252

0.84746

1,061.02

2

1,110

0.71818

797.18

3

1,445

0.60863

879.47

4

506

0.51579

260.99

5

925

0.43711

404.33

TOTAL

3,402.99

Profitability Index (PI) = Present Value of annual cash inflows / Initial Investment

= $3,402.99 / $2,889

= 1.18

“Hence, the Profitability Index (PI) of this Project is 1.18”

NOTE

The Formula for calculating the Present Value Factor is is [1/(1 + r)n], Where “r” is the Discount Rate and “n” is the number of years.

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