The profitability index for an initial outlay of $15million and subsequent end-of-year cash inflows of $5, $5 and $10 million, respectively, if the discount rate is 15 percent is 1.12.

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash inflows by the initial investment. Using a discount rate of 15%, the present value (PV) of cash inflows is: PV = $5m / (1+0.15)^1 + $5m / (1+0.15)^2 + $10m / (1+0.15)^3 = $4.35m + $3.78m + $6.71m = $14.84m. The initial outlay is $15m, so PI = $14.84m / $15m = 0.99, not 1.12.

The Profitability Index for an Initial Outlay of $15million and Subsequent