Question

Year	Project A	Project B
0	-$(290)	-$(290)
1	170	190
2	170	190
3	170	190
4	170

If the opportunity costs of capital is 11%, what is the profitability index for each project? (Do not round intermediate calculation. Round your answers to 4 decimal places)

Project	Profitability Index
A	?
B	?

Answer 1

Calculation of Profitability index of Project A

PVAF(_{11%, 4}) = Present value annuity factor at 11% for 4 years = 3.102

Present value of cash inflows = Cash inflows x PVAF(_{11%, 4})

= 170 x 3.102

= $527.34

Present value of cash outflows = Cost of project = $290

Profitability index = Present value of cash inflows/Present value of cash outflows

= 527.34/290

= 1.8184

Calculation of Profitability index of Project B

PVAF(_{11%, 3}) = Present value annuity factor at 11% for 3 years = 2.444

Present value of cash inflows = Cash inflows x PVAF(_{11%, 3})

= 190 x 2.444

= $464.36

Present value of cash outflows = Cost of project = $290

Profitability index = Present value of cash inflows/Present value of cash outflows

= 464.36/290

= 1.6012

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