A project has expected cash inflows, starting with Year 1, of $900, $1,200, $1,500, and finally in Year 4, $2,000.The profitability index is 1.11 and the discount rate is 12 percent.What is the initial cost of the project?
A)$3,899.16
B)$4,098.24
C)$3,692.71
D)$3,211.06
E)$4,250.00

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. Given PI = 1.11, the initial cost can be found by dividing the present value of cash inflows by 1.11. Calculating the present value of cash inflows at a 12% discount rate and dividing by 1.11 gives approximately $3,692.71.

A Project Has Expected Cash Inflows, Starting with Year 1