A convenience store wants to offer its customers something new and is considerin

Question

A convenience store wants to offer its customers something new and is considering adding either a deli or a car wash. The deli will require an initial investment of $55,000 and will produce annual cash inflows of $9262.85 for 11 years. The car wash will require an initial investment of $500,000 and will produce annual cash inflows of $61,000 per year for 20 years. The company has a cost of capital of 8%...What is the profitability index for the car wash? A. .92 B. .98 C. 1.2 D. 1.4 E. 1.6 F. 1.8

Explanation / Answer

So the correct answer is C

year Cash flow PV factor@8% PV f cash flow 1 $61,000 0.9259 $56,479.90 2 $61,000 0.8573 $52,295.30 3 $61,000 0.7938 $48,421.80 4 $61,000 0.735 $44,835.00 5 $61,000 0.6806 $41,516.60 6 $61,000 0.6306 $38,466.60 7 $61,000 0.5835 $35,593.50 8 $61,000 0.5403 $32,958.30 9 $61,000 0.5002 $30,512.20 10 $61,000 0.4632 $28,255.20 11 $61,000 0.4289 $26,162.90 12 $61,000 0.3971 $24,223.10 13 $61,000 0.3677 $22,429.70 14 $61,000 0.3405 $20,770.50 15 $61,000 0.3152 $19,227.20 16 $61,000 0.2919 $17,805.90 17 $61,000 0.2703 $16,488.30 18 $61,000 0.2502 $15,262.20 19 $61,000 0.2317 $14,133.70 20 $61,000 0.2145 $13,084.50 Total present value = $598,922.40 Using PI formula =present value of future cash flows / initial investments $1.20 therefore PI for the car wash is $1.2

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