Question

1. What is the profitability index of a project that has an initial cash outflow of $550, an inflow of $230 for the next 3 years and a cost of capital of 8 percent?

	A.	0.667
	B.	1.765
	C.	1.078
	D.	2.739

2.

What is the NPV for a project whose cost of capital is 12 percent and initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash inflows of $1,600,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,500,000 in year 4?

	A.	$106,543
	B.	-$196,615
	C.	-$137,053
	D.	$4,862,947

Answer 1

1.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=230/1.08+230/1.08^2+230/1.08^3

=592.732307

PI=Present value of inflows/Present value of outflows

=592.732307/550

=1.078(Approx)

2.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1,600,000/1.12+1,900,000/1.12^2+1,700,000/1.12^3+1,500,000/1.12^4

=5106543.33

NPV=Present value of inflows-Present value of outflows

=5106543.33-5,000,000

=$106543(Approx).