Homework Answers
Answer is 0.127
Cash Flows:
Year 0 = -$1,000,000
Year 1 = $550,000
Year 2 = $400,000
Year 3 = $300,000
Cost of Capital = 6.00%
Net Present Value = -$1,000,000 + $550,000/1.06 +
$400,000/1.06^2 + $300,000/1.06^3
Net Present Value = $126,752.28544
Profitability Index = Net Present Value / Initial
Investment
Profitability Index = $126,752.28544 / $1,000,000
Profitability Index = 0.127
So, the profitability index of this investment is 0.127
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