Profitability Index

EXERCISE 01

The opportunity cost of capital is 10.00%.

Year	0	1	2	3
Cash flow	-5000	2000	1500	3000

NPV=\sum_{t=0}^{N}\frac{FCF_t}{(1+r)^t}

NPV=(-5{,}000)+\frac{2{,}000}{1.1}+\frac{1{,}500}{1.1^{2}}+\frac{3{,}000}{1.1^{3}}

NPV = 311.80. Accept.

PI=\frac{PV(\mathrm{future\ inflows})}{I_0}=1+\frac{NPV}{I_0}

PI=1+\frac{311.795642}{5000}

PI = 1.062359.

EXERCISE 02

The opportunity cost of capital is 9.00%.

Year	0	1	2	3
Cash flow	-21500	7400	9800	8900

NPV=\sum_{t=0}^{N}\frac{FCF_t}{(1+r)^t}

NPV=(-21{,}500)+\frac{7{,}400}{1.09}+\frac{9{,}800}{1.09^{2}}+\frac{8{,}900}{1.09^{3}}

NPV = 409.89. Accept.

PI=\frac{PV(\mathrm{future\ inflows})}{I_0}=1+\frac{NPV}{I_0}

PI=1+\frac{409.887732}{21500}

PI = 1.019065.