Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more products. The machine cost $1.93 million and create incremental cash flows of $539,331.00 each year for the next five years. The cost of capital is 10.66%. What is the profitability index for the J-Mix 2000? ( round to 3 decimal places).

Answer 1

The profitability index is computed as shown below:

= Present value of future cash flows / Initial investment

Present value is computed as follows:

= Future value / (1 + r)ⁿ

= $ 539,331 / 1.1066 + $ 539,331 / 1.1066² + $ 539,331 / 1.1066³ + $ 539,331 / 1.1066⁴ + $ 539,331 / 1.1066⁵

= $ 2,010,478.525

So, the profitability index will be as follows:

= $ 2,010,478.525 / $ 1,930,000

= 1.042 Approximately

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