Cash Flow in millions ($) Option A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Yea

Question

Cash Flow in millions ($) Option A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 (Initial Cash Outlay) Inflows / Revenues ($8.00) $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $0.00 $0.00 $0.00 Outflows / Production Costs $47.50 $47.50 $47.50 $47.50 $47.50 $47.50 $47.50 $0.00 $0.00 $0.00 Net Inflows / Net Cash Flow $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $0.00 $0.00 $0.00 Option A Initial Cash Outlays $8.0 million Net Present Value at 15% $2,4 million Payback Period 3.2 years Probability Index ?? Internal Rate of Returns 24.52% Cash Flow in millions ($) Option A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 (Initial Cash Outlay) Inflows / Revenues ($8.00) $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $50.00 $0.00 $0.00 $0.00 Outflows / Production Costs $47.50 $47.50 $47.50 $47.50 $47.50 $47.50 $47.50 $0.00 $0.00 $0.00 Net Inflows / Net Cash Flow $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $0.00 $0.00 $0.00 Option A Initial Cash Outlays $8.0 million Net Present Value at 15% $2,4 million Payback Period 3.2 years Probability Index ?? Internal Rate of Returns 24.52%

Explanation / Answer

Solution :- Net present value (NPV) = Present value of cash inflows - Present value of cash outflow.

Present value of cash inflows = 2.50 Million * [ 1 - (1 + 0.15)-7 ] / 0.15

= 2.50 Million * [ 1 - (1.15)-7 ] / 0.15

= 2.50 Million * [ 1 - 0.376 ] / 0.15

= 2.50 Million * 0.624 / 0.15

= 2.50 Million * 4.16

= $ 10.4 Million.

Present value of cash outflow = $ 8.0 Million (Given in the question).

Accordingly, Net present value (NPV) = 10.4 Million - 8.0 Million

= $ 2.4 Million.

Profitability Index (PI) = Present value of cash inflows / Present value of cash outflow.

= 10.4 Million / 8.0 Million

= 1.30

Conclusion :- Profitability Index (PI) = 1.30

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