What is the Cleaners, Inc. is considering purchasing equipment costing $60,000 w

Question

What is the

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return.

Present Value of an Annuity of 1

Period

8%

9%

10%

11%

12%

15%

6

4.623

4.486

4.355

4.231

4.111

3.784

Reference: Ref 24-2

What is the approximate profitability index associated with this equipment?

approximate profitability index associated with this equipment?

Present Value of an Annuity of 1

Explanation / Answer

Profitability index = Present Value of Inflow / Present Value of Outflow

PV of outflow = $60000*1 = $60000

Pv of inflow = $ 14600*4.355 = $ 63583

Profitabilty Index = 63583/60000

= 1.05972

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