consider a project with the following information After-tax accounting profits A

Question

consider a project with the following information

                   After-tax accounting profits                 After-tax cash flow from operations

Year

1                               $799                                                       $750

2                                150                                                          1,000

3                                200                                                          1,200

Initial outlay = $1,500

Compute the probability index if the company's discount rate is 10%

Explanation / Answer

Probability index=P.V. of inflow/ outflow

P.v of inflow of accounting profit =799/1.10+150/(1.10)^2+200/(1.10)^3 = 1000.59

Profitability index= 1000.59/1500 = 0.67

PV of inflow of cash flow=750/1.10+1000/(1.10)^2+1200/(1.10)^3=2409.84

Profitabily index= 2409.84/1500 =1.606

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