## Answers

Profitability Index = Present value of future cash flows / initial investment

Calculating the present value of future cash flows

Year | Discount Rate (A) | Amount (B) | Present Value (A*B) |

0 | 1 | - 250,000 | -250,000 |

1 | 0.926 | 50,000 | 46,296 |

2 | 0.857 | 40,000 | 34,294 |

3 | 0.794 | 120,000 | 95,260 |

4 | 0.735 | 80,000 | 58,802 |

5 | 0.681 | 45,000 | 30,626 |

Present Value of future cash flows = 265,278

Initial Investment = 250,000

Profitability Index = 265278/250000 = 1.06

E. Accept the project because the PI is equal to 1.06, which is larger than 1

.