FI 311 Connect homework #11
1) What is the profitability index for an investment with the following cash flows given a 8
percent required return?
Year
Cash
Flow
0
$-21,000
1
$7,400
2
$9,800
3
$8,700
1.01
1.07
1.06
1.04
.99
PV
inflows
=
$7,400
+
$9,800
+
$8,700
= $22,160.11
($1.08)
1
($1.08)
2
($1.08)
3
PI = $22,160.11 / $21,000 = 1.06
2) A project has an initial cost of $8,700 and produces cash inflows of $2,600, $4,900, and
$1,600 over the next three years, respectively. What is the discounted payback period if the
required rate of return is 7 percent?
2.15 years
2.75 years
2.96 years
never
2.28 years
DCF =
$2,600
+
$4,900
+
$1,600
= 8,016
(1+ .07)
1
(1+ .07)
2
(1+ .07)
3
The project never pays back on a discounted basis as the discounted cash inflows are less than
the initial cash outflow.
3)
A firm evaluates all of its projects by applying the IRR rule.
Year
Cash Flow
0
–$33,169
1
22,000
2
15,000