Question

Freddy's BBQ, a Washington D.C. area ribs joint which caters to high level politicians, is looking to open a new franchise in Philadelphia. They anticipate that the new restaurant will cost $20.7 M to open today, but will produce cash flows of $6.9 M, $8.5 M, and $7.4 M over the next three years, respectively. What is the profitability index of this investment given a 14.09% required return?

Answer 1

Ans 0.85

	Year	Project A (i)	DF@ 14.09%	DF@ 14.09% (ii)	PV of Project A ( (i) * (ii) )
	1	6.9	1/(1+14.09%)^1	0.877	6.05
	2	8.5	1/(1+14.09%)^2	0.768	6.53
	3	7.4	1/(1+14.09%)^3	0.673	4.98
		PV			17.56
	Total of PV of Cash Inflows				17.56
	Cash Outflows				20.7
	Profitability Index =				0.85
Present value of cash Inflow / Initial Investment (Cash Outflows)	(17.56 / 20.7)