Question

A project is expected to provide cash flows of $10,050, $11,200, $14,300, and $8,800 over the next four years, respectively. At a required return of 8.6 percent, the project has a profitability index of 1.315. For this to be true, what is the project's cost at Time 0?

Answer 1

Project's cost at Time 0	=	Present Value of cash inflow	/	Profitability Index
	=	$ 36,241.72	/	1.315
	=	$ 27,560.24
Working:
Year	Cash Inflow	Discount factor	Present Value
a	b	c=1.086^-a	d=b*c
1	$       10,050	0.9208	$   9,254.14
2	$       11,200	0.8479	$   9,496.39
3	$       14,300	0.7807	$ 11,164.69
4	$         8,800	0.7189	$   6,326.50
	Total		$ 36,241.72