Dizzyland Enterprises has been presented with an investment opportunity which wi

Question

Dizzyland Enterprises has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. What is the profitability index for this investment? Dizzyland Enterprises has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. What is the profitability index for this investment?

Explanation / Answer

4.86 years

Payback period

Using the even cash flow distribution assumption, the project will

completely recover initial investment after 30/35 = 0.86 of Year 5:

30

Payback = 4 + = 4.86 years.

35

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