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Use the following information to answer the next two questions. The following project is under consideration...

Use the following information to answer the next two questions. The following project is under consideration by Riviera Holdings Corp. Riviera's requires a 13% rate of return on projects of this nature.

Year 0: Cash Flow -$17,000,000

Year 1: Cash Flow +$10,000,000

Year 2: Cash Flow +$8,000,000

Year 3: Cash Flow +$4,000,000

Year 4: Cash Flow +$6,000,000

What is the profitability index of the project?

a. 1.36

b. 1.30

c. 1.22

d. 1.65

e. 1.27

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Homework Answers

Answer #1

Answer e.1.27

Profitability Index = Present Value of Future cash flow / Initial Investment Required

= $21,568,400 / $17,000,000

=1.27

Calculation of present value of Future cash flow

Year Cashflow DF @ 13% PV
1 $    10,000,000 0.8850 $    8,850,000
2 $      8,000,000 0.7832 $    6,265,600
3 $      4,000,000 0.6931 $    2,772,400
4 $      6,000,000 0.6134 $    3,680,400
PV of future cash flow $ 21,568,400
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