Question

QUESTION 12 The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 9 percent? 1.04 .93 .85 1.09 1.12

Answer 1

Given future cash flows for Black Horse's project,

Cash inflows,

year 1 CF1 = $11000

year 2 CF2 = $11000

year 3 CF3 = $11000

year 4 CF4 = $6500

discount rate = 9%

So, PV of future cash inflows = CF1/(1+d) + CF2/(1+d)^2 + CF3/(1+d)^3 + CF4/(1+d)^4

PV = 11000/1.09 + 11000/1.09^2 + 11000/1.09^3 + 6500/1.09^4 = $32449.01

initial cost of project = $38000

So, profitability index = PV of future cash inflows/initial cost of project = 32449.01/38000 = 0.85

Option C is correct.