Question

Brooker Corporation is considering a project that requires an initial investment of $1,000 but will yield...

Brooker Corporation is considering a project that requires an initial investment of $1,000 but will yield a net cash inflow of $500 per year for the three year life of the project. What is the project's profitability index? Assume a WACC of 9%.

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Answer #1
Project
Discount rate 9.000%
Year 0 1 2 3
Cash flow stream -1000 500 500 500
Discounting factor 1.000 1.090 1.188 1.295
Discounted cash flows project -1000.000 458.716 420.840 386.092
NPV = Sum of discounted cash flows
NPV Project = 265.65
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(265.65+1000)/1000
=1.27
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