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A project has an initial cost of $94,000, a life of 9 years, and equal annual...

A project has an initial cost of $94,000, a life of 9 years, and equal annual cash inflows. The required return is 9.6 percent. According to the profitability index decision rule, what is the minimum annual cash flow necessary to accept the project?

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Answer #1

Initial Investment = $94,000
Time Period = 9 years
Required Return = 9.60%

According to the profitability index decision, a project is acceptable if profitability index is greater than 1.00.

Profitability Index = Present Value of Annual Cash Inflows / Initial Investment
1.00 = Present Value of Annual Cash Inflows / Initial Investment
Present Value of Annual Cash Inflows = Initial Investment
Annual Cash Inflows * PVA of $1 (9.60%, 9) = $94,000
Annual Cash Inflows * (1 - (1/1.0960)^9) / 0.0960 = $94,000
Annual Cash Inflows * 5.851740 = $94,000
Annual Cash Inflows = $16,063.60

Therefore, minimum annual cash flow necessary to accept the project is $16,063.60

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