You are considering a project with an initial cost of $62,260 and annual cash inflows of $11,455 in perpetuity

Finance Dec 27, 2020

You are considering a project with an initial cost of $62,260 and annual cash inflows of $11,455 in perpetuity. What discount rate, when applied to this project, will result in a profitability index of 1.00?

Expert Solution

Initial investment = $ 62260

Project cash inflow = $ 11455

Profitability index "PI" = 1

Profitability index "PI"= ((present value of cash inflows) ÷ ( Initial investment))

Present value of perpetuity = ((cash inflows) ÷ (discount rate))

PI = ((11455 ÷ discount rate) ÷ (62260))

(1 × (62260))= (11455 ÷ (discount rate))

discount rate = (11455 ÷ 62260)

discount rate = 18.398651%

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