Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. suppose a company has proposed a new 4-year projec

Suppose a company has proposed a new 4-year project. The project has an initial outlay of...

Free

90.2K

Verified Solution

Question

Finance

Suppose a company has proposed a new 4-year project. The projecthas an initial outlay of $29,000 and has expected cash flows of$7,000 in year 1, $8,000 in year 2, $11,000 in year 3, and $13,000in year 4. The required rate of return is 14% for projects at thiscompany. What is the profitability index for this project? (Answerto the nearest hundredth, e.g. 1.23)

Answer & Explanation Solved by verified expert
4.2 Ratings (717 Votes)

The cash flows are:
Year 0:$29000
Year 1:$7000
Year 2:$8000
Year 3:$11000
Year 4:$13000

In year 0, the initial outlay or cash outflow for the project is $29,000, after that the company received cash inflows from the project.

Given that the required rate of return is 14%
Profitability index=Present value of future cash flows/Initial investments
Present value of future cash flows=Cash flow in year 1/(1+required return)^1+Cash flow in year 2/(1+required return)^2+Cash flow in year 3/(1+required return)^3+Cash flow in year 4/(1+required return)4

Present value=$7000/(1+14%)^1+$8000/(1+14%)^2+$11000/(1+14%)^3+$13000/(1+14%)^4
=$7000/(1.14)^1+$8000/(1.14)^2+$11000/(1.14)^3+$13000/(1.14)^4
=$7000/1.14+$8000/1.2996+$11000/1.481544+$13000/1.68896016
=$6140.350877+$6155.740228+$7424.686678+$7697.043606
=$27417.82139

Present value of future cash flows=$27417.82139
Initial investment=$29000
Profitability index=$27417.82139/$29000=0.945442117 or 0.95 (Rounded to two decimal places)
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Suppose a company has proposed a new 4-year project. The projecthas an initial outlay of $29,000 and has expected cash flows of$7,000 in year 1, $8,000 in year 2, $11,000 in year 3, and $13,000in year 4. The required rate of return is 14% for projects at thiscompany. What is the profitability index for this project? (Answerto the nearest hundredth, e.g. 1.23)

Other questions asked by students

Q

Describe the three main goals city planners must consider to support a sustainable city. Do you...

Psychology
Q

You have conducted several interviews with department supervisors who oversee the acquisition/payment process. The following is a...

Accounting
Q

A body is projected vertically upwards from ground If t and t be the times...

Physics
Q

Select the correct answer.What is the key feature of the third-person omniscient point of view?A....

Basic Math
Q

Convert 3 4 to a decimal

Statistics
Q

The power output P as W of a certain 12 V battery is geen by...

Algebra
Q

ESTUDIO DE CASO DE CONTABILIDAD GERENCIAL. ASIGNACIN DE CASO #1: Cortland Manufacturing, Inc. ...

Accounting
Q

What is the economic order quantity if the annual demand is 10,000 units, set up...

Accounting
Q

Question: Weez Ltd is a GST registered retailer of widgets with monthly accounting periods. The...

Accounting
Q

Required information [The following information applies to the questions displayed below.) Year 1 total cash...

Accounting
Q

DDBM: A property that is book-depreciated over a 10-year period by the Double Declining Balance...

Accounting
Q

urgent please help me. Thank you Wonder company is evaluating...

Finance