Question

Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $425,000, to be paid immediately. Bill expects aftertax cash inflows of $92,000 annually for eight 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?

Answer 1

Answer:

1.075

Explanation:

The computation of the profitability index is shown below:

= Net Present value ÷ Required investment

where,

Net Present value

= Annual cash inflows × PVIFA for 8 years at 12%

= $92,000 × 4.9676

= $457,019.2 0

Refer to the PVIFA table

And, the required investment is $425,000

So, the profitability index is

= $457,019.2 0 ÷ $425,000

= 1.075