Question

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects Project A Project B Useful life 5 Years 5 Years Present value of cash inflows $84,360 $55,100 Present value of cash outflows 77,000 49,000 What is the present value index for Project A?a. 1.096.b. 0.913.c. 1.124.d. 0.889.

Answer 1

a. 1.096

Step-by-step explanation:

The present value index is the same as the profitablility index(PI), which is computed by dividing the present value of future cash inflows by the initial investment(the present value of cash outflows). A profitability of above 1 means that the project is viable as the numerator(PV of cash inflows) exceeds the denominator( initial cash outlay).

Project A PI index= Present value of cash inflows/Present value of cash outflows

Project A PI index= $84,360/$77,000

Project A PI index= 1.096