A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500 and finally in year four, $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

To calculate the initial cost of the project, we need to use the formula:

Initial Cost = PV of Cash Inflows / Profitability Index

PV of Cash Inflows = (2200/1.12) + (2900/(1.12)^2) + (3500/(1.12)^3) + (4000/(1.12^4)) = 8104.81

Profitability Index = 1.14

Initial Cost = 8104.81 / 1.14 =  $7,1196.19

Therefore, the closest answer is C, $8,166.19, which is the correct answer.

A Project Has Expected Cash Inflows, Starting with Year 1