Question

A project has cash flows of −$144,000, $60,800, $62,300 and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value?

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}**

= $ 60,800 / 1.13 + $ 62,300 / 1.13^{2} + $ 75,000 /
1.13^{3}

**= $ 154,574.1103**

**So, the profitability index will be as
follows:**

= $ 154,574.1103 / $ 144,000

**= 1.0734 Approximately**

**We shall accept the project since the profitability
index is greater than 1, which implies that the NPV of the project
is positive.**

Feel free to ask in case of any query relating to this question

A project has cash flows of -$131,000, $60,800, $62,300 and
$75,000 for years 0 to 3, respectively. The required rate of return
is 15.0 percent. What is the profitability index?

A project has cash flows of –$148,400, $42,500, $83,200, and
$42,600 for Years 0 to 3, respectively. The required rate of return
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options:
6.69; accept
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Thank you!!

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6.96; accept
6.55; accept
6.96; reject
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to 3, respectively. The required return is 8.3 percent. Based on
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Multiple Choice
9.55; reject
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E....

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Year Cash flows
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