What is the profitability index of a project that costs $8,000 and provides cash flows of $2,400 in years 1 and 2 and $4,400 in years 3 and 4? The discount rate is 10%.

What is the profitability index of a project that costs $8,000 and provides cash flows of $2,400 in years 1 and 2 and $4,400 in years 3 and 4? The discount rate is 10%.
 

 Explanation

Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual calculations.

NPV =	−$8,000 +	$2,400	+	$2,400	+	$4,400	−	$4,400	= $2,476.33
		1.10		1.102		1.103		1.104

 

Profitability index	=	NPV / Initial investment
	=	$2,476.33 / $8,000
	=	.3095

Calculator computations:

CF0	=	–8,000
CO1	=	2,400 FO1 = 2
CO2	=	4,400 FO2 = 2

I = 10

NPV CPT = 2,476.33



Thank you!