Irwin Industries is currently considering a project that will produce cash inflows of $8,000 a year...
Irwin Industries is currently considering a project that will produce cash inflows of $8,000 a year for two years followed by $6,500 a year for three more years. The cost of the project is $26,000. What is the profitability index if the discount rate is 8%?
Homework Answers
Ans 1.10
| Year | Project Cash Flows (i) | DF@ 8% | DF@ 8% (ii) | PV of Project ( (i) * (ii) ) |
| 1 | 8000 | 1/((1+8%)^1) | 0.926 | 7,407.41 |
| 2 | 8000 | 1/((1+8%)^2) | 0.857 | 6,858.71 |
| 3 | 6500 | 1/((1+8%)^3) | 0.794 | 5,159.91 |
| 4 | 6500 | 1/((1+8%)^4) | 0.735 | 4,777.69 |
| 5 | 6500 | 1/((1+8%)^5) | 0.681 | 4,423.79 |
| PV | 28,627.51 | |||
| Total of PV of Cash Inflows | 28627.51 | |||
| Cash Outflows | 26000 | |||
| Profitability Index = | 1.10 | |||
| Present value of cash Inflow / Initial Investment (Cash Outflows) | (28627.51 / 26000) | |||
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