Consider a project that requires an immediate cash outflow of $100,000 and provides a perpetual annual...
Consider a project that requires an immediate cash outflow of $100,000 and provides a perpetual annual inflow of $15,000 starting two years from today. The cost of capital is 12 percent. What is the project's PI?
1.04
1.12
1.25
1.33
Homework Answers
Present value at year 1 = Perpetual cash flow / cost of capital
Present value at year 1 = 15,000 / 0.12
Present value at year 1 = 125,000
Present value = 125,000 / (1 + 0.12)
Present value = 111,607.1429
Profitability index = Present value / initila investment
Profitability index = 111,607.1429 / 100,000
Profitability index = 1.12
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