Question

Profitability index.??Given the discount rate and the future cash flow of each project listed in the following? table, use the PI to determine which projects the company should accept. ??Cash Flow Project A Project B ??Year 0 minus?$2 comma 100 comma 000 minus?$2 comma 500 comma 000 ??Year 1 ?$650 comma 000 ?$1 comma 250 comma 000 ??Year 2 ?$750 comma 000 ?$1 comma 150 comma 000 ??Year 3 ?$850 comma 000 ?$1 comma 050 comma 000 ??Year 4 ?$950 comma 000 ?$950 comma 000 ??Year 5 ?$1 comma 050 comma 000 ?$850 comma 000 ??Discount rate 6?% 14?% What is the PI of project? A? nothing???(Round to two decimal? places.)

Answer 1

Project A:

Discount Rate = 6%

Present Value of Cash Inflows = $650,000/1.06 + $750,000/1.06^2 + $850,000/1.06^3 + $950,000/1.06^4 + $1,050,000/1.06^5
Present Value of Cash Inflows = $3,531,491.33

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $3,531,491.33 / $2,100,000
Profitability Index = 1.68

Project B:

Discount Rate = 14%

Present Value of Cash Inflows = $1,250,000/1.14 + $1,150,000/1.14^2 + $1,050,000/1.14^3 + $950,000/1.14^4 + $850,000/1.14^5
Present Value of Cash Inflows = $3,694,038.61

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $3,694,038.61 / $2,500,000
Profitability Index = 1.48

So, Company should select Project A due to higher PI