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A project with a profitability index of 1
A project with a profitability index of 1.262 is expected to provide cash flows of $140, $167, $50, and $163 over the next four years, respectively. If the required return is 8.5%, what is the project's initial cost? Round your final answer to the nearest whole dollar, and leave out the "$" sign.
Expert Solution
Profitability index =
present value of cashflows / initial investment
Calculation of present value of cashflows
Given required rate of return = 8.5%
$140*0.922 +$167*0.849+$50*0.783+$163*0.722=$427.7
. Total of PV of cash flows =$427.7
Given profitability index = 1.262
1.262 = $427.7/Intial investement
So intial investment = $427.7/1.262
Initial investment = 338.91 or 339(nearest dollar)
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