Answer:
The present value index is 0.91 which is less than 1. So, the investment should not be accepted.
Explanation:
Present Value Index : It shows the ratio between the sum of present value of all years cash inflows after applying the discount rate and initial investment.
In mathematically,
Present value index = Sum of present value of all years cash flows with discount rate ÷ Initial Investment
where,
Present value = Net cash flow × Discount rate
So,
Year 1 = $180,000 × 0.909 = $163,620
Year 2 = $120,000 × 0.826 = $99,120
Year 3 = $100,000 × 0.751 = $75,100
Year 4 = $90,000 × 0.683 = $61,470
Year 5 = $90,000 × 0.621 = $55,890
Now, Sum all the yearly cash inflows which equals to
= $163,620 + $99,120 + $75,100 + $61,470 + $55,890
= $455,200
So, the present value index = $455,200 ÷ $500,000 = 0.91
Hence, the present value index is 0.91 which is less than 1. So, the investment should not be accepted.
