The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. In this case, the cash flows are in years 1, 2, and 3, and the initial investment is in year 0. The discount rate is 5 percent.

Here are the steps to calculate the PI:

1. Calculate the present value of the future cash flows. This is done by dividing each future cash flow by (1 + discount rate) raised to the power of the year.

For year 1: PV = 542 / (1 + 0.05)^1 = 516.19
For year 2: PV = 2,075 / (1 + 0.05)^2 = 1,880.95
For year 3: PV = 3,665 / (1 + 0.05)^3 = 3,159.13

2. Sum up these present values to get the total present value of future cash flows: 516.19 + 1,880.95 + 3,159.13 = 5,556.27

3. The initial investment is the cash flow at year 0, which is -1,483.

4. Finally, calculate the PI by dividing the total present value of future cash flows by the absolute value of the initial investment: PI = 5,556.27 / 1,483 = 3.75

So, the profitability index of this project is 3.75.

Question

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. In this case, the cash flows are in years 1, 2, and 3, and the initial investment is in year 0. The discount rate is 5 percent.

Here are the steps to calculate the PI:

1. Calculate the present value of the future cash flows. This is done by dividing each future cash flow by (1 + discount rate) raised to the power of the year.

For year 1: PV = 542 / (1 + 0.05)^1 = 516.19
   For year 2: PV = 2,075 / (1 + 0.05)^2 = 1,880.95
   For year 3: PV = 3,665 / (1 + 0.05)^3 = 3,159.13

2. Sum up these present values to get the total present value of future cash flows: 516.19 + 1,880.95 + 3,159.13 = 5,556.27

3. The initial investment is the cash flow at year 0, which is -1,483.

4. Finally, calculate the PI by dividing the total present value of future cash flows by the absolute value of the initial investment: PI = 5,556.27 / 1,483 = 3.75

So, the profitability index of this project is 3.75.

Knowee AI · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. In this case, the cash flows are in years 1, 2, and 3, and the initial investment is in year 0. The discount rate is 5 percent.

Here are the steps to calculate the PI:

1. Calculate the present value of the future cash flows. This is done by dividing each future cash flow by (1 + discount rate) raised to the power of the year.

For year 1: PV = 542 / (1 + 0.05)^1 = 516.19
   For year 2: PV = 2,075 / (1 + 0.05)^2 = 1,880.95
   For year 3: PV = 3,665 / (1 + 0.05)^3 = 3,159.13

2. Sum up these present values to get the total present value of future cash flows: 516.19 + 1,880.95 + 3,159.13 = 5,556.27

3. The initial investment is the cash flow at year 0, which is -1,483.

4. Finally, calculate the PI by dividing the total present value of future cash flows by the absolute value of the initial investment: PI = 5,556.27 / 1,483 = 3.75

So, the profitability index of this project is 3.75.

A project has the following cash flows set out below. What is the profitability index of this project if the relevant discount rate is 5 percent? Enter your final answer to two decimal places. Year Cash flow 0 -1,483 1 542 2 2,075 3 3,665

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