Problem 5-7 Calculating Profitability Index Bill plans to open a self-serve groo
ID: 2646998 • Letter: P
Question
Problem 5-7 Calculating Profitability Index
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $400,000, to be paid immediately. Bill expects aftertax cash inflows of $87,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 12 percent.
What is the project
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $400,000, to be paid immediately. Bill expects aftertax cash inflows of $87,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 12 percent.
Explanation / Answer
cost of the investment= $400,000
the cash inflow is %87,000 for 7 years, the requrired return is 12%,
Profitability Index= Present value of cash inflow/ investment
present value of cash inflow= $87,000*4.564
=$397,068
PI= 397,068/400,000= 0.99267
based on PI, we should not accept the project