Purchase Solution

# PROFITABILITY INDEX COMPUTATION

Not what you're looking for?

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?

##### 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.

##### Solution Preview

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. ...

Solution provided by:
###### Education
• Doctor of Philosophy in Education, University of the Philippines
###### Recent Feedback
• "Excellent information thanks for the input"
• "Thank you"
• "Very thorough and informative. Thank you."
• "Good response. Very detailed"
• "This solution is excellent. Thank you"

##### Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

##### Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

##### Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

##### MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.