Use the following cash flows to answer Year 0 1550 Year 1

Use the following cash flows to answer:

Year 0 = ($1,550); Year 1 = $850; Year 2 = $900. The firms WACC = 8%.

What is the Profitability Index (PI)?

0.0056

1.01

1.51

1.13

	a)	0.0056
	b)	1.01
	c)	1.51
	d)	1.13

Solution

Wacc = 8% ; this we can use in calculation of present value of the investment CACULATION OF PRESTN VALUE OF THE INVESTMENT Period Particulars Amount PVF of $ 1 $ 8% Present Value 0 Outflow $           -1,550.00 $                       1.000 $               -1,550.00 1 Inflow $                850.00 $                       0.926 $                     787.04 2 Inflow $                900.00 $                       0.857 $                     771.60 Total $                         8.64 CACULATION OF PROFITABILITY INDEX OF INVESTMENT Profitability Index = 1 + Net present Value / Initial investment Profitability Index =          1 + $                     8.64 \"/\" By $                 1,550.00 Profitability Index =          1 +                         0.01 Profitability Index =                                   1.01 Answer Profitability index = 1.01