Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.97 million and create incremental cash flows of $607,358.00 each year for the next five years. The cost of capital is 10.32%. What is the profitability index for the J-Mix 2000?

Answer 1

Ans: Profitabilitiy Index = Present value of cash flows at discount rate / Initial outflow = 1.1592 (refer table for calculation

= 1.16 (rounded in two decimal )

S.No	Present value factor (1/(1+rate)^n	Present value factor (A)	Cash flows (B)	Present value (A*B)
1	1/(1.1032)	0.9065	607358	550542.06
2	1/(1.1032)^2	0.8217	607358	499041.03
3	1/(1.1032)^3	0.7448	607358	452357.71
4	1/(1.1032)^4	0.6751	607358	410041.43
5	1/(1.1032)^5	0.6120	607358	371683.68
			Present value of cash flows (C)	2283666
			Initial investment (D)	1970000
			Profitability index (C/D)	1.1592