Question

Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $410,000. Bill expects aftertax cash inflows of $89,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 14 percent.Required:What is the project’s profitability index (PI)?

Answer 1

Answer:

0.93

Explanation:

For computing the profitability index first we have to compute the net present value which is shown in the attachment

Now the profitability index is

= Present value of cash inflows (in thousands) ÷ Initial investment (in thousands)

= $381.66 ÷ $410

= 0.93

By dividing the present value of cash inflows from the initial investment we can get the PI index and the same is to be considered