Consider the following cash flows: What is the profitability index for the above

Question

Consider the following cash flows: What is the profitability index for the above set of cash flows if the relevant discount rate is 8 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 13 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 22 percent? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.161).)

Explanation / Answer

Requirement 1 : PI = 1.189

Workings

Profitability Index = PV of Future Cash FLows/ Initial Investment

@ 8 % Discount rate , PV of Future Cash Flows = 15300/(1+0.08) + 13,600/(1+0.08)^2 + 10000/(1+0.08)^3

= 14166.67 + 11659.81 + 7938.322 = 33764.8

Profitability Index = 33764.8/28400 = 1.1889 =1.189

Requirement 2 :

PI = 1.096

Workings = PV = 31121.12 , Investment 28400

PI =31121.12/28400 = 1.0958 = 1.096

Requirement 3 :

PI = 0.957

PV = 27185.38 , Investment 28400

PI = 0.957

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