What is the profitability index for the above set of cash flows if the relevant

Question

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).)

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).)

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).)

Explanation / Answer

1) Net Present value if the discount rate is 9%

NPV = 14400/(1+0.09)^1+14500/(1+0.09)^2+10900/(1+0.09)^3-29300

NPV = 33832 - 29300 = 4532

Profitability index = Present value of Net Future cash Flows/Initial Investment

Profitability index = 4532/29300 = 0.155

2) Net Present value if the discount rate is 14%

NPV = 14400/(1+0.14)^1+14500/(1+0.14)^2+10900/(1+0.14)^3-29300

NPV = 31146 - 29300 = $1846

Profitability index = Present value of Net Future cash Flows/Initial Investment

Profitability index = 1846/29300 = 0.063

3) Net Present value if the discount rate is 21%

NPV = 14400/(1+0.21)^1+14500/(1+0.21)^2+10900/(1+0.21)^3-29300

NPV = 27957 - 29300 = $-1343

Profitability index = Present value of Net Future cash Flows/Initial Investment

Profitability index = -1343/29300 = -0.046

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