Consider the following cash flows: Requirement 1: What is the profitability inde

Question

Consider the following cash flows: Requirement 1: What is the profitability index for the above set of cash flows if the relevant discount rate is 9 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) Profitability index Requirement 2: What is the profitability index if the discount rate is 14 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) Profitability index Requirement 3: What is the profitability index if the discount rate is 21 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) Profitability index

Explanation / Answer

When the discount rate is 9%

Pvif =1/(1+r)^t

Total Present value of the project = 13204.80+12194.50+8414.80 = 33814.10

Initial Investment = $29300

Profitability Index = PV of future cash flows/Initial Investment

Profitability Index =33814.10/29300 = 1.154

When discount rate is 14%

Total Present value of the project = 12628.80+11150.50+7346.60 = $31125.90

Profitability Index = PV of future cash flows/Initial Investment

Profitability Index =31125.90/29300 = 1.062

When the discount rate is 21%

Present value of total Future Cash flow = 11894.40+9903.50+6147.60 = $27945.50

Profitability Index = 27945.50/29300 = 0.953

Year CAsh Flow PVIF @9% PV of Cash flow 1 14400 0.917 14400x0.917=13204.80 2 14500 0.841 14500x0.841=12194.50 3 10900 0.772 10900x0.772=8414.80

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