Question

ABC is considering a project that has following cash flow. The cost of capital is 10%....

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

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Homework Answers

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.

Feel free to comment if you still have any query or need something else. I'll help asap.

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