Consider a project with the following cash flows: Year Cash Flow - 8000 1 3200 2 3200 3 3200 4 3200 Assume the appropriate discount rate for this project is 14%. The profitability index for this project is closest to: O A. 0.66 O B. 0.18 O C. 0.25 D. 0.17
Consider a project with the following cash flows: Year Cash Flow - 8000 1 3200 2 3200 3 3200 4 3200 Assume the appropriate discount rate for this project is 14%. The profitability index for this project is closest to: O A. 0.66 O B. 0.18 O C. 0.25 D. 0.17
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![### Project Cash Flow Analysis
#### Project Cash Flow Overview
Consider a project with the following cash flows:
| Year | Cash Flow |
|------|-----------|
| 0 | -8000 |
| 1 | 3200 |
| 2 | 3200 |
| 3 | 3200 |
| 4 | 3200 |
#### Profitability Index Calculation
Assume the appropriate discount rate for this project is 14%. The profitability index (PI) for this project is calculated to determine the relative profitability of the investment. The formula for PI is as follows:
\[ PI = \frac{\text{Present Value of Future Cash Flows}}{\text{Initial Investment}} \]
Given the discount rate and the cash flows, the options for the calculated profitability index are:
- A. 0.66
- B. 0.18
- C. 0.25
- D. 0.17
In this scenario, option D (0.17) is highlighted as the correct or closest value for the profitability index.
This implies that for every dollar invested, the project's future cash flows discount to approximately 17 cents in present value, illustrating a less favorable investment when the PI is below 1.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6b2d2087-0413-432e-842b-e7bfa6e336f7%2F0b4ae74e-d5c9-419a-a93a-0d7f1228dd10%2Fae5soyr_processed.png&w=3840&q=75)
Transcribed Image Text:### Project Cash Flow Analysis
#### Project Cash Flow Overview
Consider a project with the following cash flows:
| Year | Cash Flow |
|------|-----------|
| 0 | -8000 |
| 1 | 3200 |
| 2 | 3200 |
| 3 | 3200 |
| 4 | 3200 |
#### Profitability Index Calculation
Assume the appropriate discount rate for this project is 14%. The profitability index (PI) for this project is calculated to determine the relative profitability of the investment. The formula for PI is as follows:
\[ PI = \frac{\text{Present Value of Future Cash Flows}}{\text{Initial Investment}} \]
Given the discount rate and the cash flows, the options for the calculated profitability index are:
- A. 0.66
- B. 0.18
- C. 0.25
- D. 0.17
In this scenario, option D (0.17) is highlighted as the correct or closest value for the profitability index.
This implies that for every dollar invested, the project's future cash flows discount to approximately 17 cents in present value, illustrating a less favorable investment when the PI is below 1.
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