Question

A project has an initial outlay of $11351 and the profitability index of 1.12. The project...

A project has an initial outlay of $11351 and the profitability index of 1.12. The project is expected to generate equal free cash inflows in each of the next 5 years. What is the project's annual free cash inflow (to the nearest dollar) if its required rate of return is 8.08%?

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Answer #1

Profitability index = Total present value of inflow/ Total present value of outflow

1.12 = Total present value of inflow/11351

Total present value of inflow = 1.12*11351

Total present value of inflow = 12713.12

Required rate of return = 8.08%

Project expected cash inflow = ?     (equal for next 5 years)

∑ present value* cash inflow = 12713.12

3.9843*cash inflow= 12713.12

Cash inflow = 12713.12/3.9843

Cash inflow = 3190.804

Cash inflow in each of the next 5 years = $3191   (rounded to the nearest dollar)

year

pv

cash flow

present value

1

0.9252

3190.804

2952.131861

2

0.8561

3190.804

2731.647304

3

0.7921

3190.804

2527.435848

4

0.7328

3190.804

2338.221171

5

0.6781

3190.804

2163.684192

Total Present value of cash inflow

12713.12038
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