PROFITABILITY INDEX COMPUTATION
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6. A four-year financial project has estimates of net cash flows shown below:
Year Net Cash Flow
1 $20,000
2 $25,000
3 $30,000
4 $35,000
It will cost $65,000 to implement the project, all of which must be invested in the beginning of the project. After the fourth year, the project will have no residual value.
Using the most likely estimates of cash flows, conducted a discounted cash flow assuming a 20% hurdle rate with no inflation. Using Excel or pencil and paper, what is the discounted profitability index of the project?
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Solution Summary
This report requires the computation of profitability index of a proposed project, given the expected future cash flows during the life of the project, the discount rate, and the initial cash outlay or the cost needed for the project's implementation. Using the PI formula, the computed profitability index is 1.05. Since this is greater than 1.00, the decision is to accept the proposed project.
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PROFITABILITY INDEX COMPUTATION:
PRESENT VALUE OF THE CASH FLOWS FROM YEAR 1 TO YEAR 4:
PV FOR YEAR 1 16666.67
pv FOR YEAR 2 17361.11
PV FOR YEAR 3 17361.11
PV FOR YEAR 4 16878.86
TOTAL 68267.75
INITIAL OUTLAY: 65000
PI 1.050273
According to Keown et al. ...
Education
- Bachelor of Science in Business Administration, University of the Philippines
- Master in Business Administration, Saint Mary's University
- Doctor of Philosophy in Education, University of the Philippines
- Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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