Suppose a company has proposed a new 5-year project. The project has an initial outlay of $212,000 and has expected cash flows of $40,000 in year 1, $41,000 in year 2, $53,000 in year 3, $61,000 in year 4, and $74,000 in year 5. The required rate of return is 16% for projects at this company. What is the profitability index for this project? (Answer to the nearest hundredth, e.g. 1.23)
Profitability Index= PV of future cash flows/Initial investment
PV of future cash flows is calculated using a financial calculator by inputting the below:
The present value of cash flows is -$44,170.59.
Profitability Index= -$44,170.59/ $212,000 = -0.21
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