Question

ABC is considering a project that has following cash flow. The
cost of capital is 10%. What is the project’s profitability index?
Should ABC accept the project? Explain.

Year. Cash flows

0. ($1,000)

1. 250

2. 350

3. 250

4. 350

Answer #1

As per
the details given in the information-

ABC should not accept the project because Profitability Index is
less than

PI = 0.943

**NPV = Pv of inflow - outflow**

PV of inflow is calculated on excel by formula-

**=PV(rate,nper,pmt,fv)**

Year |
Cashflow |
Pv Of CF |

0 | -1000 | -1000 |

1 | 250 | 227.27 |

2 | 350 | 289.26 |

3 | 250 | 187.83 |

4 | 350 | 239.05 |

NPV |
-56.59 |

Profitability Index = Pv of Total inflow / Outflow

PI = 943.41 / 1000

**PI = 0.943**

**I hope this clear your
doubt.**

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