Consider the following cash flows: Year Cash Flow 0 $-29,700 1 14,000 2 14,900 3

Question

Consider the following cash flows: Year Cash Flow 0 $-29,700 1 14,000 2 14,900 3 11,300 Requirement 1: 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).) Profitability index Requirement 2: 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).) Profitability index Requirement 3: What is the profitability index if the discount rate is 24 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).) Profitability index

Explanation / Answer

Profitability Index = Present value of Future Cash Flows / Initial Investment 12% 17% 24% Year Cash Flows PV Factor PV PV Factor PV PV Factor PV 1 $14,000.00 0.892857 $12,500.00 0.854701 $11,965.81 0.806452 $11,290.32 2 $14,900.00 0.797194 $11,878.19 0.730514 $10,884.65 0.650364 $9,690.43 3 $11,300.00 0.71178 $8,043.12 0.624371 $7,055.39 0.524487 $5,926.71 PV of Future Cash flows (A) $32,421.31 $29,905.85 $26,907.46 Initial Investment (B) $29,700.00 $29,700.00 $29,700.00 Profitability Index (A / B) 1.09 1.01 0.91

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