Question

Year	Cash Flow
0	−$9,400
1	4,000
2	5,700
3	3,300

  

a. What is the profitability index for the cash flows if the relevant discount rate is 8 percent?

• 1.228
• 1.252
• 1.133
• 1.157
• 1.193

  

b. What is the profitability index for the cash flows if the relevant discount rate is 19 percent?

• 0.994
• 1.024
• 1.044
• 0.944
• 0.964

  

c. What is the profitability index for the cash flows if the relevant discount rate is 24 percent?

• 0.922
• 0.949
• 0.968
• 0.876
• 0.894

Answer 1

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

=4000/1.08+5700/1.08^2+3300/1.08^3

=11210.1814

PI=Present value of inflows/Present value of outflows

=11210.1814/9400

=1.193(Approx)

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

=4000/1.19+5700/1.19^2+3300/1.19^3

=9344.75619

PI=Present value of inflows/Present value of outflows

=9344.75619/9400

=0.994(Approx)

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

=4000/1.24+5700/1.24^2+3300/1.24^3

=8663.69038

PI=Present value of inflows/Present value of outflows

=8663.69038/9400

=0.922(Approx)