you are considering a project with cash flows of -170000, 40700 , 58300, 45000, 52800 for years 0 to 4, respectively

Finance Jan 13, 2021

you are considering a project with cash flows of -170000, 40700 , 58300, 45000, 52800 for years 0 to 4, respectively. required rate of return for this kind of investment 12 percent, what is the profitability index? should you accept or reject project based on this index value ?

Expert Solution

Year	Cash Flows	Discounting Factor [1/(1.12^year)]	PV of Cash Flows (cash flow*discounting factor)
0	-170000	1	-170000
1	40700	0.892857143	36339.28571
2	58300	0.797193878	46476.40306
3	45000	0.711780248	32030.11115
4	52800	0.635518078	33555.35454
		Profitability Index (PI) = Sum of PVs of Cash Flows(other than Initial Investment)/PV Initial Investment	0.872947967

As Profitability Index is Less than 1, Project should be Rejected.

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