Dakota, Inc. is currently considering an eight-year project that has an initial
ID: 2733330 • Letter: D
Question
Dakota, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000. The cash inflows from its project for years 1 through 8 are the same at $35,000. Dakota has a discount rate of 12%. Because there is a shortage of funds to finance all good projects, Dakota wants to compute the profitability index (PI) for each project. That way Dakota can get an idea as to which project might be a better choice. What is the PI for Dakota's current project?
About 1.24
About 1.09
About 1.19
About 1.21
About 1.24
About 1.09
About 1.19
About 1.21
Explanation / Answer
Profitability Index= PV of cashflows/Initial Investment
PV of Cashflows=(P/r)*(1-(1+r)^(-n)=(35000/0.12)*(1-(1+0.12)^(-8)=173867.39
PI=173867.39/140000=1.24
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