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You are considering a project with cash flows of -$170,000, $40,700, $58,300, $45,000
You are considering a project with cash flows of -$170,000, $40,700, $58,300, $45,000. $52,800 for years 0 to 4. respectively. If the required rate of return for this kind of investment is 12 percent, what is the profitability index? Should you accept or reject the project based on this index value? 0.93; reject O b. 0.87; accept C. 1.02; accept O d. 0.87; reject e. 0.93: accept
Expert Solution
Cash Inflow in year 1=$40700
Present Value of Casah inflow in Year1=40700/1.12=36339
Cash Inflow in year 2=$58300
Present Value of Casah inflow in Year2=58300/(1.12^2)=46476
Cash Inflow in year 3=$45000
Present Value of Casah inflow in Year3=45000/(1.12^3)=32030
Cash Inflow in year 4=$52800
Present Value of Casah inflow in Year4=52800/(1.12^4)=33555
Total Present Value of cash inflows=36339+46476+32030+33555=$148,400
Initial Investment=$170000
Profitability Index=PI=Total Present Value of Cash Inflows/Initial Investment=148400/170000=0.872941
Rounded to 0.87(two decimals). Since it is less than ONE it should be rejected
ANSWER:
d. 0.87 Reject
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