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3.) A project has the following cash flows, for years 0 through 3 respectively: -21,208, 11,916,...

3.)

A project has the following cash flows, for years 0 through 3 respectively: -21,208, 11,916, 14,745, 14,465. If the required return is 10.6 percent, what is the profitability index?

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Answer #1

Profitability Index= PV of future cash flows/Initial investment

Project A

PV of future cash flows is calculated using a financial calculator by inputting the below:

  • Press the CF button.
  • CF0= -$21,208.
  • Cash flow for each year should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the NPV button and enter the required rate of return of 10.6%.
  • Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The present value of cash flows is $12,311.91.

Profitability Index= $12,311.91/ $21,208 = 0.58.

In case of any query, kindly comment on the solution.

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