Question

A project has an initial cost of $63,400, expected net cash inflows of $8,000 per year for 11 years, and a cost of capital of 14%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Answer 1

Profitability Index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$63,400. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 14%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 14% cost of capital is -$19,778.14.

Profitability Index= -$19,778.14 + $63,400/ $63,400

= $43,621.86 / $63,400

= 0.69.

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