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A project has an initial outlay of $10293 and the profitability index of 1.75. The project...

A project has an initial outlay of $10293 and the profitability index of 1.75. The project is expected to generate equal free cash inflows in each of the next 8 years. What is the project's annual free cash inflow (to the nearest dollar) if its required rate of return is 8.77%?
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Answer #1

Initial Outlay of the project= $10293
Profitability index of the project= 1.75 times

Formula to calculate the Profitability index= it would be
Present Value of Future Cashflows/Initial Investment
by substituting the above data in the given formula we get Present Value of Future Cashflows
1.75= Present Value of Future Cashflows/$10293
Present Value of Future Cashflows= $10293*1.75
= $18012.75 approx. $18013.
Now we will check what would be the expected return/cost of capital= 8.77%
The present value of Cash inflows= Annual Cashflow*Present Value Annuity Factor(Rate of return, No. of years)
= $18013= Annual Cashflow*PVAF(8.77%, 8years)
= $18013= Annual Cashflow*5.58
=Annual Cashinflow= $18013/5.58
= $3228. 13_ approx. $3228

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