Use the following table for questions .
-A company has a minimum required rate of return of 9% and is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $20,000 at the end of each year for three years.The profitability index for this project is

Question

Use the following table for questions . 
-A company has a minimum required rate of return of 9% and is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $20,000 at the end of each year for three years.The profitability index for this project is

Quizplus · Accepted Answer

To calculate the profitability index, we take the present value of the future cash inflows and divide it by the initial investment. Using a discount rate of 9%, we can calculate the present value of the cash inflows as follows:

Year 1: $20,000 / (1 + 0.09)^1 = $18,348.62
Year 2: $20,000 / (1 + 0.09)^2 = $16,854.23
Year 3: $20,000 / (1 + 0.09)^3 = $15,463.10

Total present value = $50,666.95

Profitability index = Total present value / Initial investment
Profitability index = $50,666.95 / $50,000 = 1.013

Therefore, the profitability index for this project is 1.01, which means that for every $1 invested, the company will receive $1.01 in present value of future cash inflows. This project is acceptable as it has a profitability index greater than 1.

Use the Following Table for Questions