Question

Year Cash Flow

0 −$7,900

1 2,600

2 3,500

3 2,600

a. What is the profitability index for the cash flows if the relevant discount rate is 8 percent?

Multiple Choice

0.974

0.993

0.899

0.917

0.946

b. What is the profitability index for the cash flows if the relevant discount rate is 19 percent?

Multiple Choice

0.785

0.808

0.824

0.745

0.761

c. What is the profitability index for the cash flows if the relevant discount rate is 22 percent?

Multiple Choice

0.749

0.771

0.786

0.711

0.726

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

a.Present value of inflows=2600/1.08+3500/1.08^2+2600/1.08^3

=$7472.06

PI=Present value of inflows/Present value of outflows

=$7472.06/$7900

=0.946(Approx).

b.Present value of inflows=2600/1.19+3500/1.19^2+2600/1.19^3

=$6199.33

PI=Present value of inflows/Present value of outflows

=6199.33/$7900

=0.785(Approx).

c.Present value of inflows=2600/1.22+3500/1.22^2+2600/1.22^3

=$5914.50

PI=Present value of inflows/Present value of outflows

=$5914.50/$7900

=0.749(Approx).