Question

Pod has a project with the following cash flows:

year cash flows
0 − $ 285,000
1 145,300
2 162,800
3 127,900

the required return is 8.1 percent. what is the profitability index for this project?

Answer 1

The profitability index for this project is 0.3421.

Step-by-step explanation:

To calculate the profitability index, we need to find the present value of each cash flow and then divide the sum of the present values by the initial investment. Using the given cash flows and required return of 8.1 percent, we can calculate the present value of each cash flow as follows:

Year 0: PV = -$285,000

Year 1: PV = $145,300 / (1+0.081)^1 = $134,439.33

Year 2: PV = $162,800 / (1+0.081)^2 = $141,972.15

Year 3: PV = $127,900 / (1+0.081)^3 = $106,195.13

Next, we sum up the present values: -$285,000 + $134,439.33 + $141,972.15 + $106,195.13 = $97,606.61.

Finally, we divide the sum of the present values ($97,606.61) by the initial investment (-$285,000) to get the profitability index: $97,606.61 / -$285,000 = -0.3421. However, since the profitability index represents the profitability of an investment relative to its cost, we can drop the negative sign. Therefore, the profitability index for this project is 0.3421.