What is the Profitability Index (PI)of a project that requires an initial investment of $36,000 and pays after-tax cash flows of $10,000 in year 1, $18,000 in year 2, $15,000 in year 3, and $12,000 in year 4? Assume the discount rate is 9%.

Question

Quizplus · Accepted Answer

To calculate the Profitability Index, we need to divide the present value of future cash flows by the initial investment. 
PV of year 1 cash flow = $10,000/(1.09^1) = $9,174.31 
PV of year 2 cash flow = $18,000/(1.09^2) = $14,811.20 
PV of year 3 cash flow = $15,000/(1.09^3) = $11,290.61 
PV of year 4 cash flow = $12,000/(1.09^4) = $8,525.57

Total PV of cash flows = $9,174.31 + $14,811.20 + $11,290.61 + $8,525.57 = $43,801.69

Profitability Index = $43,801.69/$36,000 = 1.22

Therefore, the correct answer is (C) 1.23.

What Is the Profitability Index (PI)of a Project That Requires