A project has expected cash inflows,starting with year 1,of $2,200,$2,900,$3,500,and finally in year 4,$4,000.The profitability index is 1.14 and the discount rate is 12 percent.What is the initial cost of the project?
A)$7,899.16
B)$8,098.24
C)$8,166.19
D)$9,211.06
E)$9,250.00

Question

Quizplus · Accepted Answer

The formula for calculating the initial cost of the project using profitability index is:

Initial cost = PV of cash inflows / PI

PV of cash inflows = (2200/1.12) + (2900/(1.12^2)) + (3500/(1.12^3)) + (4000/(1.12^4)) = $9,211.06

Initial cost = 9211.06 / 1.14 = $8,166.19

Therefore, the best choice is C.

A Project Has Expected Cash Inflows,starting with Year 1,of $2,200,$2,900,$3,500,and