Suppose a company has proposed a new 4-year project. The project has an initial outlay of $21,000 and has expected cash flows of $6,000 in year 1, $9,000 in year 2, $11,000 in year 3, and $13,000 in year 4. The required rate of return is 15% 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 $5,688.16.
Profitability Index= $5,688.16/ $21,000 = 0.27
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