Question

Year	Cash Flow
0	−$7,700
1	4,200
2	4,300
3	4,500

  

Required :

(a)	What is the profitability index for the cash flows if the relevant discount rate is 7 percent?

	(Click to select)$1.475$1.401$1.43$1.548$1.519

  

(b)	What is the profitability index for the cashflows if the relevant discount rate is 18 percent?
	(Click to select)$1.182$1.219$1.158$1.28$1.256

  

(c)	What is the profitability index for the cashflows if the relevant discount rate is 21 percent?
	(Click to select)1.1041.1621.1271.221.197

Answer 1

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

=4200/1.07+4300/1.07^2+4500/1.07^3

=11354.3606

PI=Present value of inflows/Present value of outflows

=11354.3606/7700

=1.475(Approx).

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

=4200/1.18+4300/1.18^2+4500/1.18^3

=9386.35401

PI=Present value of inflows/Present value of outflows

=9386.35401/7700

=1.219(Approx).

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

=4200/1.21+4300/1.21^2+4500/1.21^3

=8948.16492

PI=Present value of inflows/Present value of outflows

=8948.16492/7700

=1.162(Approx).