Question

You are offered an investment with returns of $ 1,456 in year 1, $ 3,786 in...

You are offered an investment with returns of $ 1,456 in year 1, $ 3,786 in year 2, and $ 4,555 in year 3. The investment will cost you $ 7,320 today. If the appropriate Cost of Capital (quoted interest rate) is 8.3 %, what is the Profitability Index of the investment? Enter your answer to the nearest .01. Do not use the $ sign or commas in your answer. If the NPV is negative, use the - sign.

Homework Answers

Answer #1
Project
Discount rate 8.300%
Year 0 1 2 3
Cash flow stream -7320 1456 3786 4555
Discounting factor 1.000 1.083 1.173 1.270
Discounted cash flows project -7320.000 1344.414 3227.927 3585.940
NPV = Sum of discounted cash flows
NPV Project = 838.28
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(838.28+7320)/7320
1.11
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