Year Cash Flow 0 –$ 17,900 1 10,200 2 9,100 3 5,600 What is the profitability in
ID: 2760491 • Letter: Y
Question
Year Cash Flow 0 –$ 17,900 1 10,200 2 9,100 3 5,600 What is the profitability index for the set of cash flows if the relevant discount rate is 9 percent? (Do not round intermediate calculations and round your final 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 14 percent? (Do not round intermediate calculations and round your final 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 21 percent? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161)) Profitability index
Explanation / Answer
Let us first understand what is Profitability index
Profitability index is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initial investment required for the project.
Formula:
Explanation:
Profitability index is actually a modification of the net present value method. While present value is an absolute measure (i.e. it gives as the total dollar figure for a project), the profibality index is a relative measure (i.e. it gives as the figure as a ratio).
Decision Rule
Accept a project if the profitability index is greater than 1, stay indifferent if the profitability index is zero and don't accept a project if the profitability index is below 1.
Profitability index is sometimes called benefit-cost ratio too and is useful in capital rationing since it helps in ranking projects based on their per dollar return.
sum of all PRESENT VALUE OF CASH FLOWS:
+$17900+$9357.798+$7659.288+$4324.227=$39241.313
NOW THE INFORMATION RELATED TO INVESTEMENT REQUIRED IS MISSING YOU JUST HAVE TO DIVIDE THE SUM OF ALL CASH FLOWS WITH THE INVETMENT REQUIED TO FING OUT THE PROFITABILITY INDEX
AND THE REMANING TWO PARTS CAN BE SOLVED ON THE SAME FOOTING AS THIS IS DONE
FOR YOUR READY REFERNCE
DISCOUNTING FACTOR FOR COLOUMN 3 AT 14 % RATE
JUST REPLACE COLOUMN 3 VALUES WITH THESE DISCOUNT FACTORS AS GIVEN IN ABOVE TABKE TO SOLVE PART 2 AND 3 WITH 14% & 21&
Profitability Index = Present Value of Future Cash Flows /Initial investment periodExplanation:
Profitability index is actually a modification of the net present value method. While present value is an absolute measure (i.e. it gives as the total dollar figure for a project), the profibality index is a relative measure (i.e. it gives as the figure as a ratio).
Decision Rule
Accept a project if the profitability index is greater than 1, stay indifferent if the profitability index is zero and don't accept a project if the profitability index is below 1.
Profitability index is sometimes called benefit-cost ratio too and is useful in capital rationing since it helps in ranking projects based on their per dollar return.
Now we have to find out present value of cash flows, this means the discounted values of cashflows using the given discount ratecase 1: years cash flows(1) disclunting factor using 9% discounting rate(2) present value of cash flows(1)*(2) 0 $17,900 1 $17900 1 $10,200 1/1.09=..917 $9357.798 2 $9,100 .917/1.09=.842 $7659.288 3 $5,600 .842/1.09=.772 $4324.227
sum of all PRESENT VALUE OF CASH FLOWS:
+$17900+$9357.798+$7659.288+$4324.227=$39241.313
NOW THE INFORMATION RELATED TO INVESTEMENT REQUIRED IS MISSING YOU JUST HAVE TO DIVIDE THE SUM OF ALL CASH FLOWS WITH THE INVETMENT REQUIED TO FING OUT THE PROFITABILITY INDEX
AND THE REMANING TWO PARTS CAN BE SOLVED ON THE SAME FOOTING AS THIS IS DONE
FOR YOUR READY REFERNCE
DISCOUNTING FACTOR FOR COLOUMN 3 AT 14 % RATE
JUST REPLACE COLOUMN 3 VALUES WITH THESE DISCOUNT FACTORS AS GIVEN IN ABOVE TABKE TO SOLVE PART 2 AND 3 WITH 14% & 21&
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.