I need Help please Suppose your firm is considering investing in a project with

Question

I need Help please

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

Explanation / Answer

Hi,

Please find the answer as follows:

Present Value of Cash Inflows = 1210/(1+.07)^1 + 2410/(1+.07)^2 + 1610/(1+.07)^3 + 1610/(1+.07)^4 + 1410/(1+.07)^5 + 1210/(1+.07)^6 = 7589.91

Profitability Index = NPV/Initial Outflow = (7589.91 - 4800)/4800 = .58

No, the project should not be accepted as PI is less than 1.

Thanks.

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