Question

Calculate the profitability index for a project that costs 100,000 and will result in the following cashflows over a 5-year period: 5,000, 10,000, 15,000, 20,000, 25,000. Assume a discount rate of 5%. Solve in excel

Answer 1

To calculate the profitability index for a project, you need to calculate the present value of each cash flow and then divide the sum of the present values by the initial investment cost.

Step-by-step explanation:

To calculate the profitability index for a project, you need to calculate the present value of each cash flow and then divide the sum of the present values by the initial investment cost. In this case, the cash flows are $5,000, $10,000, $15,000, $20,000, and $25,000 over a 5-year period, and the initial investment cost is $100,000. The discount rate is given as 5%. Using Excel, you can use the formula =NPV(discount rate, range of cash flows) to calculate the net present value for the cash flows. Then divide the NPV by the initial investment cost to get the profitability index.