What is the profitability index for the set of cash flows if the relevant discou
ID: 2712158 • Letter: W
Question
What is the profitability index for the set of cash flows if the relevant discount rate is 11 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
Profitability index __________
What is the profitability index for the set of cash flows if the relevant discount rate is 16 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
Profitability index __________
What is the profitability index for the set of cash flows if the relevant discount rate is 23 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
Profitability index __________
Year Cash Flow 0 –$ 18,400 1 10,700 2 9,600 3 6,100Explanation / Answer
Profitability index at 11% discount rate is as follows:
Use the following formula:
Present value of future cash flows/Initial investment
=21,890/18,400
=1.19
Working note:
Year
Cash flow
Discount rate@11%
Discounted cash flow
0
-18400
1.00
-18,400.00
1
10700
0.90
9,639.63
2
9600
0.81
7,791.36
3
6100
0.73
4,459.71
21,890.70
The profitability index is 1.19.
Profitability index at 16% discount rate is as follows:
=20,260/18,400
=1.1
Year
Cash flow
Discount rate@16%
Discounted cash flow
0
18400
1.00
18,400.00
1
10700
0.86
9,223.40
2
9600
0.74
7,132.80
3
6100
0.64
3,904.00
20,260.20
Thus, it is 1.1
Profitability index at 23% discount rate is as follows:
=18,321/18,400
=1
Year
Cash flow
Discount rate@23%
Discounted cash flow
0
18400
1.00
18,400.00
1
10700
0.81
8,699.10
2
9600
0.66
6,344.64
3
6100
0.54
3,277.53
18,321.27
Thus, it is 1.
Year
Cash flow
Discount rate@11%
Discounted cash flow
0
-18400
1.00
-18,400.00
1
10700
0.90
9,639.63
2
9600
0.81
7,791.36
3
6100
0.73
4,459.71
21,890.70
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