Problem 7-9 Calculating Profitability Index Bill plans to open a self-serve groo

Question

Problem 7-9 Calculating Profitability Index Bill plans to open a self-serve grooming center in a storefront The grooming equipment will cost $425,000. Bill expects aftertax cash inflows of $92000 annually for eight years, after which he plans to scrap the equipment and retre to the beaches of Nevis. The first cash Infiow occurs at the end of the first year. Assume the required return is 12 percent What is the project's profitability Index (P)? (Do not round Intermedlate calculations and round your answer to 3 declmal places, e.g. 32.161.) Should the project be accepted? ? Yes O No

Explanation / Answer

Since PI is greater than 1 the project will be accepted

A B C D E F G H I Year 0 1 2 3 4 5 6 7 8 1 Cash Flows -425,000 92000 92000 92000 92000 92000 92000 92000 92000 2 Discount Rate 12% NPV 32022.86 Using NPV Formula in excel NPV(A2,B1:J1)+A1 Profitability index = 1+NPV/Initial investment 1.075 (=1+32022.86/425000)

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