What is the profitability index for the above set of cash flows if the relevant
ID: 2651553 • Letter: W
Question
What is the profitability index for the above set of cash flows if the relevant discount rate is 12 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 17 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 25 percent? (Do not round intermediate calculations.Round your answer to 3 decimal places (e.g., 32.161).)
Consider the following cash flows:
Explanation / Answer
Answer:
1
Calculation of profitability index
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 15,000.00
1/(1+0.12)^1
0.89286
$ 13,392.86
2
$ 13,900.00
1/(1+0.12)^2
0.79719
$ 11,080.99
3
$ 10,300.00
1/(1+0.12)^3
0.71178
$ 7,331.34
Present value of Cash inflows (PVCI)
$ 31,805.19
Cash Outflows
0
$ 28,700.00
1/(1+0.12)^0
1.00000
$ 28,700.00
Present value of Cash inflows (PVCO)
$ 28,700.00
Profitability Index = PVCI /PVCO
1.108
2
Calculation of profitability index
Cash Inflows
Year
Cash Inflow
PVF (17%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 15,000.00
1/(1+0.17)^1
0.85470
$ 12,820.51
2
$ 13,900.00
1/(1+0.17)^2
0.73051
$ 10,154.14
3
$ 10,300.00
1/(1+0.17)^3
0.62437
$ 6,431.02
Present value of Cash inflows (PVCI)
$ 29,405.67
Cash Outflows
0
$ 28,700.00
1/(1+0.17)^0
1.00000
$ 28,700.00
Present value of Cash inflows (PVCO)
$ 28,700.00
Profitability Index = PVCI /PVCO
1.025
3
Calculation of profitability index
Cash Inflows
Year
Cash Inflow
PVF (25%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 15,000.00
1/(1+0.25)^1
0.80000
$ 12,000.00
2
$ 13,900.00
1/(1+0.25)^2
0.64000
$ 8,896.00
3
$ 10,300.00
1/(1+0.25)^3
0.51200
$ 5,273.60
Present value of Cash inflows (PVCI)
$ 26,169.60
Cash Outflows
0
$ 28,700.00
1/(1+0.25)^0
1.00000
$ 28,700.00
Present value of Cash inflows (PVCO)
$ 28,700.00
Profitability Index = PVCI /PVCO
0.912
1
Calculation of profitability index
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 15,000.00
1/(1+0.12)^1
0.89286
$ 13,392.86
2
$ 13,900.00
1/(1+0.12)^2
0.79719
$ 11,080.99
3
$ 10,300.00
1/(1+0.12)^3
0.71178
$ 7,331.34
Present value of Cash inflows (PVCI)
$ 31,805.19
Cash Outflows
0
$ 28,700.00
1/(1+0.12)^0
1.00000
$ 28,700.00
Present value of Cash inflows (PVCO)
$ 28,700.00
Profitability Index = PVCI /PVCO
1.108
2
Calculation of profitability index
Cash Inflows
Year
Cash Inflow
PVF (17%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 15,000.00
1/(1+0.17)^1
0.85470
$ 12,820.51
2
$ 13,900.00
1/(1+0.17)^2
0.73051
$ 10,154.14
3
$ 10,300.00
1/(1+0.17)^3
0.62437
$ 6,431.02
Present value of Cash inflows (PVCI)
$ 29,405.67
Cash Outflows
0
$ 28,700.00
1/(1+0.17)^0
1.00000
$ 28,700.00
Present value of Cash inflows (PVCO)
$ 28,700.00
Profitability Index = PVCI /PVCO
1.025
3
Calculation of profitability index
Cash Inflows
Year
Cash Inflow
PVF (25%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 15,000.00
1/(1+0.25)^1
0.80000
$ 12,000.00
2
$ 13,900.00
1/(1+0.25)^2
0.64000
$ 8,896.00
3
$ 10,300.00
1/(1+0.25)^3
0.51200
$ 5,273.60
Present value of Cash inflows (PVCI)
$ 26,169.60
Cash Outflows
0
$ 28,700.00
1/(1+0.25)^0
1.00000
$ 28,700.00
Present value of Cash inflows (PVCO)
$ 28,700.00
Profitability Index = PVCI /PVCO
0.912
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