Question
Asked Oct 9, 2019
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A project requires an initial investment of $40 million. It generates cash flows of $25 million in one year and $27 million in two years. The projects required rate of return is 8% what is the project's profitability index?

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Expert Answer

Step 1

Calculation of Profitability Index:

The profitability index is 1.16.

Excel Spreadsheet:

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в C D Year Cash Flows FVIF@ 8%| PV of Cash Flows 1 $25,000,000 2 $27,000,000 Total PV of Cash Flows 1.08 2 $23,148,148.15 1.1664 $23,148,148.15 $46,296,296.30 $40,000,000 3 4 Initial Investment 5 Profitability Index 6 1.16

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