Question

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.

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