What is the profitability index for an investment with the following cash flows given a discount rate of 11% and an initial investments of $19,400 ? year cash flow $0 2 $11,000 3 $12,000 a

Finance Jan 22, 2021

What is the profitability index for an investment with the following cash flows given a discount rate of 11% and an initial investments of $19,400 ? year cash flow $0 2 $11,000 3 $12,000 a. 0,97 b.1.01 01.10

Expert Solution

Answer is 1.01

Cash Flows:
Year 0 = -$19,400
Year 1 = $0
Year 2 = $11,000
Year 3 = $12,000

Discount Rate = 11%

Present Value of Cash Inflows = $0 + $11,000/1.11 + $12,000/1.11^2
Present Value of Cash Inflows = $19,649.3791

Profitability Index = Present Value of Cash Inflows / Initial Investment
Profitability Index = $19,649.3791 / $19,400
Profitability Index = 1.01

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