Question

A project has cash flows of -$132,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 14.0 percent. What is the profitability index?  DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ENTER YOUR ANSWER TO TWO DECIMAL PLACES (e.g. 25.75).

*work out step by step or by hand not on excel or any other program!*

Answer 1

Profitability Index (PI) for the project

Year	Annual cash inflow ($)	Present Value factor at 14.00%	Present Value of Annual cash inflow ($)
1	60,800	0.877193	53,333.33
2	62,300	0.769468	47,937.83
3	75,000	0.674972	50,622.86
TOTAL			1,51,894.02

Profitability Index (PI) for the Project = Present Value of annual cash inflows / Initial Investment

= $1,51,894.02 / $132,000

= 1.15

“Hence, the Profitability Index (PI) for the project will be 1.15”

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.