Question

What is the profitability index for the following set of cash flows if the relevant discount...

What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year Cash Flow

0 -16,700

1-9,700

2 -7,800

3 - 4,300

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Answer:

discount rate = 10%

profitability index = pv of future cash flows/initial investment
= (9700/1.1 + 7800/1.1^2 + 4300/1.1^3)/16700
=1.1075

discount rate = 15%

profitability index = pv of future cash flows/initial investment
= (9700/1.15 + 7800/1.15^2 + 4300/1.15^3)/16700
=1.027546

discount rate = 22%

profitability index = pv of future cash flows/initial investment
= (9700/1.22 + 7800/1.22^2 + 4300/1.22^3)/16700
= 0.9317

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