You are given the following cash flows If you assume a 145 p

You are given the following cash flows. If you assume a 14.5 percent required return, what is the profitability index?

Year 0 -$46,500
Year 1 $12,200
Year 2 $38,400
Year 3 $11,300

Select one:

a. 0.94

b. 0.98

c. 1.02

d. 1.06

e. 1.11

The internal rate of return

Select one:

a. May produce multiple rates of return when cash flows are conventional

b. Is best used when comparing mutually exclusive projects

c. Is rarely used in the business world today

d. Is principally used to evaluate small dollar projects

e. Is easy to understand

Solution

Question 1 Answer: Option c. 1.02 Explanation Profitability Index = (NPV+ Initial Investment) / Initial Investment PV Discount factor = 1/(1+r)n Year Cash Flows Discount factor at 14.5% Discounted cash Flows 0 -46500 1.00000 -46500 1 12200 0.87336 10655 2 38400 0.76276 29290 3 11300 0.66617 7528 NPV 973 Profitability Index = (973+46500)46500 = 1.02 Question 2 Answer: Option e.Easy to understand