Question

34.

Westover Company is considering a project that provides an annual cash inflow of $150,000 for the first six years, $200,000 per year for Year 7 through Year 9, and $500,000 for Year 10. The project requires an initial investment of $1 million. If the firm’s required return for this project is 10 percent, what is the profitability index?

1.1268

1.0522

1.1108

1.0233

1.1203

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=150,000/1.1+150,000/1.1^2+...........+150,000/1.1^6+200,000/1.1^7+200,000/1.1^8+200,000/1.1^9+500,000/1.1^10

=150,000[1/1.1+1/1.1^2+..............+1/1.1^6]+200,000[1/1.1^7+1/1.1^8+1/1.1^9]+500,000/1.1^10

=(150,000*4.355260699)+(200,000*1.403763117)+(500,000*0.385543289)

=$1,126,813.373

PI=Present value of inflows/Present value of outflows

=$1,126,813.373/$1,000,000

=1.1268(Approx).