The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.

If auto restorers will pay $3,000 retail per engine block, what is the project profitability index?

Question

If auto restorers will pay $3,000 retail per engine block, what is the project profitability index?

Quizplus · Accepted Answer

The project profitability index is 1.78. This is calculated by dividing the present value of the project's cash flows by the initial investment. The present value of the project's cash flows is $1,424,000. The initial investment is $800,000. Therefore, the project profitability index is 1.78.

The Managers of PonchoParts, Inc