Question

The following project is under consideration by Smith's Food Markets, Inc. Smith's requires a 14% rate of return on projects of this nature.

Cost Year 0 = -$200,000

Cash Flows Years 1-3: +$90,000

What is the Profitability Index of the project?

Group of answer choices

a. 1.50

b. 1.67

c. 1.08

d. 1.35

e. 1.04

Answer 1

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.14^a	d=b*c
1	$ 90,000	0.877193	$           78,947.37
2	$ 90,000	0.769468	$           69,252.08
3	$ 90,000	0.674972	$           60,747.44
Present value of cash inflow			$        208,946.88
Profitability Index = Present value of cash inflow /initial investment
=$208946.88/200000
=1.04
Correct Answer = e.1.04