A capital budgeting project has a net investment of $250,000 and is expected to generate net cash flows of $90,000 annually for 5 years

Finance Dec 25, 2020

A capital budgeting project has a net investment of $250,000 and is expected to generate net cash flows of $90,000 annually for 5 years. What is the profitability index at a 13% required rate of return? O 1.27 1.80 1.24 1.30

Expert Solution

Answer is 1.27Statement showing Cash flowsParticularsTimePVf 13%AmountPVCash Outflows - 1.00 (250,000.00) (250,000.00)PV of Cash outflows = PVCO (250,000.00)Cash inflows 1.00 0.8850 90,000.00 79,646.02Cash inflows 2.00 0.7831 90,000.00 70,483.20Cash inflows 3.00 0.6931 90,000.00 62,374.51Cash inflows 4.00 0.6133 90,000.00 55,198.69Cash inflows 5.00 0.5428 90,000.00 48,848.39PV of Cash Inflows =PVCI 316,550.81PI = PVCI/PVCO 1.27

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