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?
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 |
Get Answers For Free
Most questions answered within 1 hours.