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A firm is considering a project that requires an initial investment of $250,000. The life of...

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Finance

A firm is considering a project that requires an initialinvestment of $250,000. The life of this project is five years.Cash flows for each year are estimated as follows:

Year 1Year 2Year 3Year 4Year 5
$80,000$120,000$160,000$40,000-$90,000

The cost of capital of this project is 8%. Calculate theprofitability index and make a decision.

Answer & Explanation Solved by verified expert
4.5 Ratings (763 Votes)
Profitability index is calculated using the below formula Profitability Index NPV Initial investment Initial investment Net present value is calculated using a    See Answer
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