Vanguard Healthcare Inc. considers a project with the following cash flows: Afte

Question

Vanguard Healthcare Inc. considers a project with the following cash flows:

                          After-Tax           After-Tax

                       Accounting        Cash Flow

            Year          Profits       from Operations

            1                $799                 $ 750

            2                $150                 $1,000

            3                $200                 $1,200

            Initial outlay = $1,500

            Terminal cash flow = 0

            Compute the profitability index if the company%u2019s discount rate is 10%.

15.8

1.61

1.81

0.62

Explanation / Answer

PV of cash flows = 750/1.1 + 1000/1.1^2 + 1200/1.1^3 = 2409.84

Profitability index = 2409.84/1500 = 1.61

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