Question

Pod has a project with the following cash flows: year 0 cash flow -241000 year 1 cash flow 147500 year 2 cash flow 165000 year 3 cash flows 130100. the required return is 8.8%. what is the profitability index for this project?

a) 0.92
b) 1.22
c) 0.78
d) 0.99

Answer 1

To calculate the Profitability Index for Pod's project, the present value of each future cash flow is determined using the discount rate of 8.8%, then added together. The total present value is then divided by the initial investment to find the PI.

Step-by-step explanation:

The Profitability Index (PI) for Pod's project can be found by calculating the present value of future cash flows and dividing it by the initial investment. The required rate of return is 8.8%. The present value (PV) of each cash flow is calculated using the formula:

PV = Cash Flow / (1 + r)n

where r is the rate of return and n is the number of years. Applying this formula for each cash flow and summing them up gives the total present value of future cash flows. Finally, to find the PI, we divide the total PV by the initial investment.

• Year 0 PV = $-241,000
• Year 1 PV = $147,500 / (1 + 0.088)1
• Year 2 PV = $165,000 / (1 + 0.088)2
• Year 3 PV = $130,100 / (1 + 0.088)3

Sum these present values to get the total PV, and then divide by the initial investment ($-241,000) to get the PI. The four options given represent the possible values of the PI for this project, and the correct option is the one that matches the calculation.