Question

Initial investment $15,000. Cash inflow for the next 3 years: $6,800, $7,200, and $7,500. What is the project’s profitability index? Should you invest in this project and why? Explain in detail.

That's all what the question include.

Discount Rate 0

Answer 1

Profitability Index:

It is reatio of Present value of future cash inflows to Initial amount invested.

PI = PV of Cash inflows / PV of Cash Outflows
If PI > 1, Project will be accepted,
PI = 1, Indifference point. Project will be accepted/ Rejected.
PI < 1, Project will be rejected.

if the discount rate is 0%, PV of Cash flows and Cash flow are same.

PV of Cash inflows = $ 6800 + $ 7200 + $ 7500

= $ 21500

PI = $ 21500 / $ 15000

= 1.4333

As PI > 1, Project ois accepted.