Question: What is the profitability index if the discount rate is 10%?

(Posted by: KayGeeTX on 2010-03-02 08:52:19)

Sun Company is considering purchasing new equipment costing $350, 000. Sun's management has estimated that the equipment will generate cash flows as follows: year 1 $100, 000 year 2 $100, 000 year 3 $125, 000 year 4 $125, 000 year 5 $75, 000 A. .14 B .45 C. .52 D 1.14

Posted by: Bayzz on 2010-03-02, 09:56:33

Answer is A. - Profitability Index = 0.14 Working As you Know , Profitibility Index = NPV / Investment amount For calculation of NPV 012345 Investment (350,000) Inflow 100,000 100,000 125,000 125,000 75,000 Net Cash (350,000) 100,000 100,000 125,000 125,000 75,000 PV@10% (350,000) 90,909 82,645 93,914 85,377 46,569 NPV- 49,414 Profitability Index = NPV / Investment Profitability Index = 49,414 / 350,000 Profitability Index = 0.14 Cheers