Question

A project requires an initial cash outflow of $6,900, and it will bring in cash inflows of $3,200, $1,100, $1,100, $1,200, for the next four years, respectively. What is this project’s the profitability index (PI), given a discount rate of 14%?

Answer 1

0.74

PI	=	Present Value of cash inflow	/	Initial cash outflow
	=	$ 5,106.40	/	$ 6,900.00
	=	0.74
Working:
Calculation of present value of cash inflow:
Year	Cash Inflow	Discount factor	Present Value
a	b	c=1.14^-a	d=b*c
1	$       3,200	0.877193	$ 2,807.02
2	$       1,100	0.7694675	$     846.41
3	$       1,100	0.6749715	$     742.47
4	$       1,200	0.5920803	$     710.50
Total			$ 5,106.40