Question

Calculate the profitability index for the cash flows provided in the table below.? Note: The negative...

Calculate the profitability index for the cash flows provided in the table below.? Note: The negative cash flow for year 0 is the initial investment for the project. Assume a required rate of return of? 9.00%

Year 0,1,2,3

Cash Flow -$90,000, ?$32,000, ?$32,000, ?$32,000

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Answer #1
Profitability Index 0.90
Working:
a. Present value of future cash inflows
Year Cash flows Discount factor Present Value
1 $       32,000           0.9174 $ 29,357.80
2 $       32,000           0.8417 $ 26,933.76
3 $       32,000           0.7722 $ 24,709.87
Total $ 81,001.43
b. Profitability Index = Present Value of future cash inflows/Initial Investment
= $ 81,001.43 / $       90,000
= 0.90
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