The Fitness Center is considering including a treadmill in this year\'s capital
ID: 2789092 • Letter: T
Question
The Fitness Center is considering including a treadmill in this year's capital budget. The cash outlay for the treadmill is $ 1 comma 590$1,590. The firm's cost of capital is 7.4 %7.4%. After-tax cash flows, including depreciation, are as shown in the table below. Calculate the profitability index (PI) for this project.
End of Year Cash Flow
1 $ 520
2 $520
3 $520
4 $520
5 $520
The present value of the cash inflows is ______.
(Round to the nearest cent.)
The profitability index is _______.
(Round to two decimal places.)
Explanation / Answer
Present value of all cash inflows is $2109.54
Net present value is ($2109.46 – $1590) = $519.46
Profitability index is = 1.33
Explanation and working;
Year
Cash flow
Discounting factor
Present value
0
($1590)
----
($1590)
1
$520
1.074
$484.17
2
$520
(1.074)2
$450.81
3
$520
(1.074)3
$419.75
4
$520
(1.074)4
$390.83
5
$520
(1.074)5
$363.90
Net present value
$519.46
Profitability Index;
Formula is as follow;
Present value of future cash inflows / Initial investment
Thus on putting values;
$2109.54 / $1590 = 1.33 (Approx.)
Year
Cash flow
Discounting factor
Present value
0
($1590)
----
($1590)
1
$520
1.074
$484.17
2
$520
(1.074)2
$450.81
3
$520
(1.074)3
$419.75
4
$520
(1.074)4
$390.83
5
$520
(1.074)5
$363.90
Net present value
$519.46
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