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A project has cash flows of -$131,000, $60,800, $62,300 and $75,000 for years 0 to 3,...

A project has cash flows of -$131,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 15.0 percent. What is the profitability index?

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Answer #1

Profitability Index (PI) = PV of Inflows / PV of outflow

If PI is greater than 1, then the project has positive NPV and it is acceptable.

Year Outflow Inflows Discounting factor @ 15% PV of Outflows PV of Inflows
0 131,000.00 1.0000 131,000.00
1 60,800.00 0.8696 52,869.57
2 62,300.00 0.7561 47,107.75
3 75,000.00 0.6575 49,313.72
Total 131,000.00 149,291.03

Profitability Index = PV of inflows / PV of outflows = 149291.03/131000 = 1.1396

Therefore project is acceptable

Thumbs up please if satisfied. Thanks :)

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