Question

4) A project has an initial cost of $57,300, expected net cash inflows of $13,000 per year for 10 years, and a cost of capital of 13%. What is the project's PI? (Hint: Begin by constructing a timeline.) Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The value of Company net cash inflows stbthe present value will be calculated as follows-

= (13000/1.13)+(13000/(1.13)^2)+ (13000/(1.13)^3)+(13000/(1.13)^4)+(13000/(1.13)^5+(13000/(1.13)^6)+(13000/1.13)^7)+(13000/(1.13)^8)+(13000/(1.13)^9)+(13000/(1.13)^10)

= $ 70534.1

Profitability index = (Net cash inflows at present value/initial cash outflows)

= (70534.1/57300)

° 1.2310

If the Profitability index is greater than 1, the project is to be accepted and if profitability index is lesser than 1, project is to be rejected.

This project is to be accepted as profitability index is greater than 1.