POD has a project with the following cash flows: Year Cash Flows0 −$243,0001 147,4002 164,9003 130,000 The required return is 8.7 percent. What is the profitability index for this project?

The Profitability Index (PI) is a financial metric used to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as:

PI = (Present Value of Cash Inflows) / (Initial Investment)

The present value of cash inflows can be calculated using the formula for the present value of an annuity:

PV = CF / (1 + r)^n

Where:

• PV is the present value
• CF is the cash flow for the period
• r is the required return rate
• n is the period number

Let's calculate the present value of cash inflows:

For Year 1: PV1 = 147,400 / (1 + 0.087)^1 = $135,564.58

For Year 2: PV2 = 164,900 / (1 + 0.087)^2 = $139,536.91

For Year 3: PV3 = 130,000 / (1 + 0.087)^3 = $101,783.78

The total present value of cash inflows is the sum of these, which is $376,885.27.

The initial investment is $243,000.

So, the profitability index (PI) is:

PI = $376,885.27 /$243,000 = 1.55

So, the profitability index for this project is 1.55. This means that for every dollar invested, the project will return $1.55.