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.
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 / 1.1309^{1} + $ 630,586 / 1.1309^{2} + $ 630,586 / 1.1309^{3} + $ 630,586 / 1.1309^{4} + $ 630,586 / 1.1309^{5} + $ 630,586 / 1.1309^{6}
= $ 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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