Jabber Company is considering the purchase of an investment with a 4-year life span. The initial investment is $65,000 and net annual cash flows were $28,000 for year 1; $22,000 for year 2; $25,000 for year 3; and $30,000 for year 4. There is no salvage value. If the company has a cost of capital of 10%, what is the investment's profitability index?

Question

Quizplus · Accepted Answer

$25,455 + $18,182 + $18,783 + $20,490 = $82,910 as the PV of future net annual cash flows. $82,910÷$65,000 = 1.28.
([(Annual Cost Savings Year 1 x PV of 1 at 10% factor) + (Annual Cost Savings Year 2 x PV of 1 at 10% factor) + (Annual Cost Savings Year 3 x PV of 1 at 10% factor) + (Annual Cost Savings Year 4 x PV of 1 at 10% factor) + Initial investment)) ÷ Initial Investment

Jabber Company Is Considering the Purchase of an Investment with a 4-Year