Berra, Inc. is currently considering an eight-year project that has an initial o

Question

Berra, Inc. is currently considering an eight-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years one through eight are the same at $30,000. Berra has a discount rate of 11%. Because of capital rationing (shortage of funds for financing), Berra wants to compute the profitability index (PI) for each project. What is the PI for Berra's current project?

A. About. 1.29

B. About 1.31

C. About 1.33

D. About 1.39

Consider the following 10-year project. The initial after-tax outlay or after- tax cost is $1,000,000. The future after-tax cash inflows each year for years one through 10 are $200,000 per year. What is the payback period without discounting cash flows?

A. 10 years  B.  5 years. C.  2.5 years.  D. 0.5 years

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Profitability Index = Present Value of Future Cash Inflows/Initial Cost

Present Value of Future Cash Inflows = 30000/(1+.11)^1 + 30000/(1+.11)^2 + 30000/(1+.11)^3 + 30000/(1+.11)^4 + 30000/(1+.11)^5 + 30000/(1+.11)^6 + 30000/(1+.11)^7 + 30000/(1+.11)^8 = 154383.68

Profitability Index = 154383.68/120000 = 1.286 or 1.29

Option A is correct.

Part B:

Payback Period = Initial Investment/Annual Cash Inflows = 1000000/200000 = 5 Years

Option B is the correct answer.

Thanks.

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