10. Hunter Corporation has the following investment opportunities: I. Machine A
ID: 2803613 • Letter: 1
Question
10. Hunter Corporation has the following investment opportunities: I. Machine A requires an initial investment of $10,000 and is projected to realize cash inflows of $4,000 in year 1, $6,000 in year 2, and $3,000 in year 3. II. Machine B requires an initial investment of $16,000 and is projected to realize cash inflows of $9,000 in year 1, $6,000 in year 2, and $8,000 in year 3. Hunter Corporation uses a hurdle rate of 15%. What is the profitability index of an investment in Machine B? Select one: A. 0.93 B. 1.10 C. 1.34 D. 1.53
Explanation / Answer
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=9000/1.15+6000/1.15^2+8000/1.15^3
=$17623.07882
PI=Present value of inflows/Present value of outflows
=$17623.07882/$16000
=1.10(Approx).
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