Question

Year	Cash Flow
0	−$7,600
1	3,200
2	4,300
3	2,400

  

a. What is the profitability index for the cash flows if the relevant discount rate is 11 percent?

  

b. What is the profitability index for the cash flows if the relevant discount rate is 16 percent?

  

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

Answer 1

a)

Present value = 3,200 / (1 + 0.11)¹ + 4,300 / (1 + 0.11)² + 2,400 / (1 + 0.11)³

Present value = $8,127.7187

Profitability index = Present value / initial investment

Profitability index = 8,127.7187 / 7,600

Profitability index = 1.069

b)

Present value = 3,200 / (1 + 0.16)¹ + 4,300 / (1 + 0.16)² + 2,400 / (1 + 0.16)³

Present value = $7,491.7996

Profitability index = Present value / initial investment

Profitability index = 7,491.7996 / 7,600

Profitability index = 0.986

c)

Present value = 3,200 / (1 + 0.22)¹ + 4,300 / (1 + 0.22)² + 2,400 / (1 + 0.22)³

Present value = $6,833.6557

Profitability index = Present value / initial investment

Profitability index = 6,833.6557 / 7,600

Profitability index = 0.899