A project with an initial cost of 29800 is expected to provi

A project with an initial cost of $29,800 is expected to provide cash flows of $9,600, $10,900, $14,000, and $8,500 over the next four years, respectively. If the required return is 8.3 percent, what is the project\'s profitability index?

1.187

1.088

.989

.843

1.335

Solution

Profitability index = Present value of cash inflows / initial investment

Present value of cash inflows = 9,600 / ( 1 + 0.083)¹ + 10,900 / ( 1 + 0.083)² + 14,000 / ( 1 + 0.083)³ + 8,500 / ( 1 + 0.083)⁴

Present value of cash inflows = 35,357.9214

Profitability index = 35,357.9214 / 29,800

Profitability index = 1.187