The profitability index (PI) is a financial metric that is widely used to measure the probability of an investment or a project. The profitability index is calculated by dividing the present value of future cash flows by the initial investment.

Here's how you can calculate the profitability index step by step:

1. Calculate the present value (PV) of future cash flows. You can use the formula: PV = CF / (1 + r)^n, where CF is the cash flow, r is the discount rate, and n is the period.

For year 1: PV = 3,900 / (1 + 0.08)^1 = 3,611.11
For year 2: PV = 3,300 / (1 + 0.08)^2 = 2,824.31
For year 3: PV = 3,100 / (1 + 0.08)^3 = 2,428.31

2. Add up all the present values of future cash flows: 3,611.11 + 2,824.31 + 2,428.31 = 8,863.73

3. Divide the total present value of future cash flows by the initial investment: PI = 8,863.73 / 8,300 = 1.07

So, the profitability index for the cash flows is 1.07 when the relevant discount rate is 8 percent. This means that for every dollar invested, we will get a return of $1.07.

Question

The profitability index (PI) is a financial metric that is widely used to measure the probability of an investment or a project. The profitability index is calculated by dividing the present value of future cash flows by the initial investment.

Here's how you can calculate the profitability index step by step:

1. Calculate the present value (PV) of future cash flows. You can use the formula: PV = CF / (1 + r)^n, where CF is the cash flow, r is the discount rate, and n is the period.

For year 1: PV = 3,900 / (1 + 0.08)^1 = 3,611.11
For year 2: PV = 3,300 / (1 + 0.08)^2 = 2,824.31
For year 3: PV = 3,100 / (1 + 0.08)^3 = 2,428.31

2. Add up all the present values of future cash flows: 3,611.11 + 2,824.31 + 2,428.31 = 8,863.73

3. Divide the total present value of future cash flows by the initial investment: PI = 8,863.73 / 8,300 = 1.07

So, the profitability index for the cash flows is 1.07 when the relevant discount rate is 8 percent. This means that for every dollar invested, we will get a return of $1.07.

Knowee AI · Accepted Answer

The profitability index (PI) is a financial metric that is widely used to measure the probability of an investment or a project. The profitability index is calculated by dividing the present value of future cash flows by the initial investment.

Here's how you can calculate the profitability index step by step:

1. Calculate the present value (PV) of future cash flows. You can use the formula: PV = CF / (1 + r)^n, where CF is the cash flow, r is the discount rate, and n is the period.

For year 1: PV = 3,900 / (1 + 0.08)^1 = 3,611.11
For year 2: PV = 3,300 / (1 + 0.08)^2 = 2,824.31
For year 3: PV = 3,100 / (1 + 0.08)^3 = 2,428.31

2. Add up all the present values of future cash flows: 3,611.11 + 2,824.31 + 2,428.31 = 8,863.73

3. Divide the total present value of future cash flows by the initial investment: PI = 8,863.73 / 8,300 = 1.07

So, the profitability index for the cash flows is 1.07 when the relevant discount rate is 8 percent. This means that for every dollar invested, we will get a return of $1.07.

Year Cash Flow0 −$8,300 1 3,900 2 3,300 3 3,100 a. What is the profitability index for the cash flows if the relevant discount rate is 8 percent?

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