Consider the following project:
Initial outlay = $15 million
Year 1 expected cash flow = $5 million
Year 2 expected cash flow = $5 million
Year 3 expected cash flow = $10 million
Project cost of capital = 10%
The profitability index for this project is closest to:

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial investment. Using the given cash flows and a discount rate of 10%, the present value (PV) of future cash flows is: PV = $5M / (1+0.1)^1 + $5M / (1+0.1)^2 + $10M / (1+0.1)^3 = $4.545M + $4.132M + $7.513M = $16.19M. The initial outlay is $15M, so the PI = $16.19M / $15M = 1.08.

Consider the Following Project