Mulligan, Inc. is currently considering an eight-year project that has

QUESTION

Mulligan, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000. The cash inflows from its project for years 1 through 8 are the same at $35,000. Mulligan has a discount rate of 12%. Because there is a shortage of funds to finance all good projects, Mulligan wants to compute the profitability index (PI) for each project. That way Mulligan can get an idea as to which project might be a better choice. What is the PI for Mulligans current project?
Solution: Initial investment = 140,000 Cash inflow per year = 35,000 Term (years) = 8 Discount rate = 12% PV of annuity factor (r=12%, n=8) = 4.9676 PV of future cash flows = 35,000*

676 = $173,867.39 Profitability Index (PI) = PV of future cash flows / Initial investment PI = $173,867.39 / $140,000 = 1.24

ANSWER:

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