Consider the following project being analyzed for possible investment at ABC Corp. Initial Cost –$50 Inflow...

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Finance

Consider the following project being analyzed for possibleinvestment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 InflowYear 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10All amounts are in millions. The required return for the project is8%. The project’s profitability index is: (Enter your answer out totwo decimal places. As an example, you would enter 1.50 as1.50)

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3.6 Ratings (495 Votes)

The project profitability index is 1.14

Working:

Calculation of present value of cash inflows:

Year	Cash inflow	Discount factor	Present value of cash inflows
a	b	c=1.08^-a	d=b*c
1	$ 15.00	0.925926	$ 13.89
2	$ 15.00	0.857339	$ 12.86
3	$ 20.00	0.793832	$ 15.88
4	$ 10.00	0.73503	$ 7.35
5	$ 10.00	0.680583	$ 6.81

	Total		$ 56.78

Calculation of profitability index:

Profitability index		=	Present value of cash inflows	/	Initial cost of the project
		=	$ 56.78	/	$ 50.00
		=	1.14

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Consider the following project being analyzed for possibleinvestment at ABC Corp. Initial Cost –$50 Inflow Year 1 $15 InflowYear 2 $15 Inflow Year 3 $20 Inflow Year 4 $10 Inflow Year 5 $10All amounts are in millions. The required return for the project is8%. The project’s profitability index is: (Enter your answer out totwo decimal places. As an example, you would enter 1.50 as1.50)

Consider the following project being analyzed for possible investment at ABC Corp. Initial Cost –$50 Inflow...

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90.2K

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Finance

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