Bill plans to open a self-serve grooming center in a storefront. The grooming eq

Question

Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $415,000, to be paid immediately. Bill expects aftertax cash inflows of $90,000 annually for eight years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 10 percent.

What is the project’s PI? (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

Explanation / Answer

Profitability Index = Present value of cash inflows / Present value of cash outflows

= 90000*PVAF ( 10%, 8years)/415000

= 90000*5.335/415000

= 480143.36/415000 i.e 1.157

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