Question

What´s the probability index (PI) for the following set of cash flows if the relevant discount...

What´s the probability index (PI) for the following set of cash flows if the relevant discount rate is 18%.

0. year = 50 000$ (initial investment) 1.year = 18 000$ 2.year = 17 500$ 3. year = 18 500$

Is this project feasible or not according to PI?  

Homework Answers

Answer #1
The Profitability index (PI) = Present value of future cash flows/Initial investment
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 18% and t is the time period in years.
t 0 1 2 3
cash flow -50000 18000 17500 18500
present value 15254.24 12568.23 11259.67
sum of present values 39082.14
PI 39082.14/50000
PI 39082.14/50000
PI 0.781643
The PI is .78.
According to the PI, the project is not feasible because the PI
is less than 1.
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