Bill plans to open a self-serve grooming center in a storefront. The grooming eq

Question

Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $405,000, to be paid immediately. Bill expects aftertax cash inflows of $88,000 annually for six years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 13 percent. What is the project’s profitability index (PI)? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

Explanation / Answer

PI =C(PVIFAR,t) /C0

PI = $88,000(PVIFA13%,6) / $405,000

=88000*(1-(1+.13)^(-7))/.13

=351784.40/405000

PI = .869

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