Jim Bob is bored with the car business and is looking to expand into a little bo

Question

Jim Bob is bored with the car business and is looking to expand into a little bookmaking.
This venture will require an aftertax initial (cash) outlay of $1,000,000 (an outflow). Jim
Bob thinks he can stay in the business for 4 years before he gets caught. The year 4 cash
flow will be an outflow (in order to keep people quiet). Jim Bob's required rate of return
for this project is 20%. The project will generate the following after-tax cash flows:
Period               CF(+ are inflows, - are outflows)
0                        -1,000,000

1                        +600,000

2                        +400,000

3                        +500,000

4                       -100,000

a) Calculate the PI (profitability index) for this project

Explanation / Answer

Answer:

Calculation of PI: PV of cash inflows/PV of cash outflow

=1067106/1048225.3

=1.01801206

Particulars Time PVF (20%) Amount ($) PV ($) Cash outflow 0 1 1000000 1000000 4 0.48225 100000 48225.309 PVCO (A) 1048225.3 Cash Inflow 1 0.8333 600000 499980 2 0.69444 400000 277776 3 0.5787 500000 289350 PVCI (B) 1067106

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