What is the Profitability Index of a project that costs $41,000 today and is expected to...
What is the Profitability Index of a project that costs $41,000 today and is expected to generate annual cash inflows of $5,000 for the following 10 years. Assume the company's WACC is 9%. Round to two decimal places.
Homework Answers
Profitability Index = Present Value of Future Cash Flows / Initial Investment
= [ $ 5000 * 1/(1.09) ^ 1 + $ 5000 * 1/(1.09) ^2+ $ 5000 * 1/(1.09) ^3+ $ 5000 * 1/(1.09) ^4+........+ $ 5000 * 1/(1.09) ^10] / $ 41,000
= $ 32,088.29 / $ 41,000
= 0.78
Hence the correct answer is 0.78
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