Question

7,

A project with an initial cost of $29,800 is expected to provide cash flows of $9,600, $10,900, $14,000, and $8,500 over the next four years, respectively. If the required return is 8.3 percent, what is the project's profitability index?

Multiple Choice

• .843

• .989

• 1.335

• 1.088

• 1.187

Answer 1

Project's Profitability Index

Year	Annual Cash Inflows ($)	Present Value factor at 8.30%	Present Value of Annual Cash Inflows ($)
1	9,600	0.923361	8,864.27
2	10,900	0.852596	9,293.29
3	14,000	0.787254	11,021.55
4	8,500	0.726919	6,178.81
TOTAL			35,357.92

Project's Profitability Index = Present Value of annual cash inflows / Initial Investment

= $35,357.92 / $29,800

= 1.187

“Therefore, the Project's Profitability Index (PI) is 1.187”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.