Cheryl Peck purchased a computer network for her classroom. The computer network cost $100,000. She estimates that she can charge $500 for one session in the classroom. Cheryl knows that enrollment will increase over time. She estimates 50 students the first year, 75 students the second year, 100 students the third year, and 150 students the fourth year. If her cost of capital is 16 percent, what is the approximate profitability index?

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of future cash flows by the initial investment. The cash flows for each year are calculated by multiplying the number of students by the session fee. The present value of these cash flows is then calculated using the cost of capital (16%). The sum of these present values is divided by the initial investment ($100,000) to get the profitability index, which is approximately 1.23.

Cheryl Peck Purchased a Computer Network for Her Classroom