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Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining's cost of...

Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining's cost of capital is 13.09%. What is the PI of a project if the initial costs are $2,472,241 and the project life is estimated as 6 years. The project will produce the same after-tax cash inflows of $630,586 per year at the end of the year.

Round the answer to two decimal places.

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Answer #1

The PI is computed as shown below:

= Present value of future cash flows / Initial investment

Present value of future cash flows is computed as follows:

= $ 630,586 / 1.13091 +  $ 630,586 / 1.13092 +  $ 630,586 / 1.13093 +  $ 630,586 / 1.13094 +  $ 630,586 / 1.13095 +  $ 630,586 / 1.13096

= $ 2,514,493.783

So, the PI will be:

= $ 2,514,493.783 / $ 2,472,241

= 1.02 Approximately

Feel free to ask in case of any query relating to this question

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