ActSc 371 7.7 and 7.8 Practice Problems
What is the profitability index for the following cash flows, if the relevant discount rate is 15%?
Solution: PV of cash flows after the initial investment is: 10,320.54.
The PI is this value divided
by the absolute value of the original investment
This is 10320.54/10000=1.03
The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300.
The asset has a
three-year life, will produce a cashflow of $1,200 in the first and second year, and $3,000 in the
The interest rate is 12%.
Calculate the project's discounted payback and Profitability
Index assuming end of year cash flows.
Should the project be taken?
Step 1: Calculate the NPV using the calculator = -136.60
Because NPV is less than zero, discounted payback cannot be calculated.
Step 2: to calculate the PI, first calculate the NPV without including the initial cashflow (i.e. -