Question

A project has an initial cost of $45,000, expected net cash inflows of $14,000 per year for 7 years, and a cost of capital of 13%. What is the project's PI? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to two decimal places.

My answer = 1.38. Would like to double check to see if that is correct.

Answer 1

Initial Cost = $45,000
Annual Cash Inflows = $14,000
Time Period = 7 years
Cost of Capital = 13%

Present Value of Cash Inflows = $14,000/1.13 + $14,000/1.13^2 + … + $14,000/1.13^6 + $14,000/1.13^7
Present Value of Cash Inflows = $14,000 * (1 - (1/1.13)^7) / 0.13
Present Value of Cash Inflows = $14,000 * 4.422610
Present Value of Cash Inflows = $61,916.54

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $61,916.54 / $45,000
Profitability Index = 1.38