Question

A project has an initial cost of $72,350, expected net cash inflows of $13,000 per year for 8 years, and a cost of capital of 10%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Answer 1

profitabiliity index = present value of cash inflows / present value of outflows.

here,

present value of cash inflows = $13,000 * PV of annuity factor for 8 years @10%....(since inflows are inform of annuity).

PV of annuity = [1-(1+r)^(-n)]/r

here,

r = 10%=>0.10

n = 8

=> [1-(1.10)^(-8)]/0.10

=>0.5334926/0.10

=>5.334926.

present value of cash inflows = $13,000*5.334926

=>$69,354.038.

now,

present value of cash outflows = $72,350.

project's PI = $69,354.038 / 72,350

=>0.96.....(rounded to two decimals).

Since PI is less than 1, the project can be rejected.