1. Irwin Industries is currently considering a project that will produce cash in

Question

1. Irwin Industries is currently considering a project that will produce cash inflows of $81,000 a year for two years followed by $79,000 a year for three more years. The cost of the project is $269,000. What is the profitability index if the discount rate is 9.3 percent?

2. Setesh of Kanaan's new pyramid project has expected cash inflows, starting with year 1, of $2,900, $4,000, $5,700 and finally in year four, $7,400. The profitability index is 1.49 and the discount rate is 10.6 percent. What is the initial cost of the project?

Thank you!!!

Explanation / Answer

1. The  profitability index = Present Value of Cash Inflows /  Present Value of Cash Outflows

= [ ( $ 81,000 * 1/(1.093) ^ 1+ $ 81,000 * 1/(1.093) ^ 2 +  $ 79,000 * 1/(1.093) ^3 +$ 79,000 * 1/(1.093) ^4+$ 79,000 * 1/(1.093) ^5] / $ 269,000

= $308,409.34 / $ 269,000

= 1.15

Hence the correct answer is 1.15

2. The  profitability index = Present Value of Cash Inflows /  Present Value of Cash Outflows

1.49= [ $ 2,900 *1/(1.106) ^ 1+ $ 4,000*1/(1.106) ^ 2 +$ 5,700*1/(1.106) ^ 3 + $ 7,400*1/(1.106) ^ 4] / Present Value of Cash Outflows

or 1.49 = $ 15,050.76/ Present Value of Cash Outflows

Hence, Present Value of Cash Outflows = $ 15,050.76 / 1.49

= $ 10,101.81

= $ 10,102

Hence the correct answer is $ 10,102

Note : The answer is rounded off to the nearest whole number.

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