What is the profitability index of a project that has an initial cash outflow of R600, an inflow of R250 for the next 3 years and a cost of capital of 10 percent?

Question

0.667
2.036
1.036
2.739

Answer 1

The profitability index is calculated by dividing the present value of the project's future cash inflows by the initial cash outflow:

PV of future cash inflows = R250 / (1 + 0.10)^1 + R250 / (1 + 0.10)^2 + R250 / (1 + 0.10)^3
PV of future cash inflows = R227.27 + R206.61 + R187.83
PV of future cash inflows = R621.71

Profitability Index = PV of future cash inflows / Initial cash outflow
Profitability Index = R621.71 / R600
Profitability Index = 1.036

Therefore, the profitability index of the project is 1.036.