Question
Asked Nov 24, 2019
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Find the net present value (NPV) and profitability index (PI) of a project that costs $1,500 and returns $800 in year one and $850 in year two. Assume the project’s cost of capital is 8 percent.

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Expert Answer

Step 1

The net present value for the project is calculated below:

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C2 (1+1(1+i) Net present value -Co + + Here, Co is cash flow at time 0. C is cash flow at time 1. C is cash flow at time 2 i is discount rate $800 $850 Net present value = -$1,500 (1+0.08) (10.08) =-S1,500+$740.74+ $728.74 =-$30.52

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Step 2

The formula to calculate profitability index is given below:

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Present value of cash inflows Profitability index Initial investment

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Step 3

Substitute ($740.74 + $728.74) =$1,469.48 for present value...

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$1,469.48 Profitability index $1,500 =0.98

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