Consider the following cash flows: Year Cash Flow 0 $-28,600 1 15,100 2 13,800 3

Question

Consider the following cash flows: Year Cash Flow 0 $-28,600 1 15,100 2 13,800 3 10,200

What is the profitability index for the above set of cash flows if the relevant discount rate is 11 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).)

What is the profitability index if the discount rate is 16 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).)

What is the profitability index if the discount rate is 23 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).)

What is the profitability index for the above set of cash flows if the relevant discount rate is 11 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).)

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Profitability Index = Present Value of Cash Inflows/Initial Investment

Part A:

Present Value of Cash Inflows = 15100/(1+.11)^1 + 13800/(1+.11)^2 + 10200/(1+.11)^3 = 32262.15

Profitability Index = 32262.15/28600 = 1.128

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Part B:

Present Value of Cash Inflows = 15100/(1+.16)^1 + 13800/(1+.16)^2 + 10200/(1+.16)^3 = 29807.60

Profitability Index = 29807.60/28600 = 1.042

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Part C:

Present Value of Cash Inflows = 15100/(1+.23)^1 + 13800/(1+.23)^2 + 10200/(1+.23)^3 = 26879.29

Profitability Index = 26879.29/28600 = .940

Thanks.

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