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Homework answers / question archive / Question 3) Good Morning Food, Inc
Question 3) Good Morning Food, Inc. is using the profitability index (PI) when evaluating projects. You have to find the PI for the company's project, assuming the company's cost of capital is 12.01 percent. The initial outlay for the project is $493,432. The project will produce the following end-of-the-year after-tax cash inflows of
Year 1: $161,605
Year 2: $187,879
Year 3: $238,821
Year 4: $459,168
Round the answer to two decimal places.
Your Answer:
profitability index (PI) = 1.53
Step-by-step explanation
Present value of cash flows = C1/(1+R)^1 + C2/(1+R)^2 + C3/(1+R)^3 + C4/(1+R)^4
Present value of cash flows = 161,605/1.1201^1 + 187,879/1.1201^2 + 238,821/1.1201^3 + 459,168/1.1201^4
Present value of cash flows = $755,674.459815
profitability index (PI) = Present value of cash flows/initial outlay
profitability index (PI) = 755,674.459815/493,432
profitability index (PI) = 1.53
