Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000.
|
Project |
Investment |
CF 1 |
CF 2 |
CF 3 |
CF 4 |
|
See |
-900,000 |
320,000 |
380,000 |
440,000 |
310,000 |
Calculate the profitability index. Do you accept the project? Explain.
Profitability index = Present value / investment
Present value = 320,000 / (1 + 0.08)1 + 380,000 / (1 + 0.08)2 + 440,000 / (1 + 0.08)3 + 310,000 / (1 + 0.08)4
Present value = $1,199,230.488
Profitability index = 1,199,230.488 / 900,000
Profitability index = 1.33
You should NOT accept the project.
A project with profitability index less than 0 should be rejected. A project with profitability index will have a negative NPV and will reduce the value of the company.
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