Earl Llc is investing in a new piece of equipment that cost $300,000. The new eq

Question

Earl Llc is investing in a new piece of equipment that cost $300,000. The new equipment will generate cash flow of $200,000 for each of the next three years. Earl uses a discount rate of 12%. What is the present value index?
A. 2.1 B 1.4 C 1.6 D 1.8 Earl Llc is investing in a new piece of equipment that cost $300,000. The new equipment will generate cash flow of $200,000 for each of the next three years. Earl uses a discount rate of 12%. What is the present value index?
A. 2.1 B 1.4 C 1.6 D 1.8
A. 2.1 B 1.4 C 1.6 D 1.8

Explanation / Answer

Present value index means the ratio of present value of all the future cash flow and expenses.

Present value index greater then 1, means project is profitable and should be accepted.

Present value index = PV of cash flow ÷ initial investment.

Pv of cash flow = $200,000×PVaf (12%, 3years)

Pv of cash flow = $200,000 × 2.4018

Pv of cash flow = $480,366.25

So putting value in above equation we get,

Present value index = $480,366 / $300,000

Present value index = 1.60

Hence the answer will be C) 1.6.

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