This Question 1 pt 15 of 31 0 complete This Test 31 pts pos

This Question: 1 pt 15 of 31 (0 complete) This Test: 31 pts pos Question Help the following project. The project requires an initial investment of $1.800 and provides 5 annual The present value of the cash inflows is S (Round to the nearest cent.) The profitability index is ? (Round to two decimal places.)

Solution

1… Present value of cash inflows= Using formula to calculate the Present Value of annuities Annuity amt.*(1-(1+r)^-n)/r= r being the cost of capital & n being the no.of annual periods 295*(1-1.139^-5)/0.139= 1015 The profitability Index (PI)=NPV/Initial cash outflow Where , NPV=PV of cash outflows-PV of cash Inflows So, PI=(-1800+1015)/1800 -0.44 2.. IRR is the interest rate at which the PVs of cash inflows of a project exactly equal the PVs of its cash outflows. In otherwords, when cash flows are discounted at IRR, the project\'s NPV=0 Annual after-tax cash flow= 335 Add Back: Annual Depreciation(1010/5)= 202 Annual Operating cash flow=(335+202)= 537 Now,equating the cash flows\' PV to 0 , -1010+(537*(1-(1+r)^-5)/r)=0 & solving for r, we get the IRR as 44.82% ANSWER: IRR of the project is 44.82%