Profitability Index and Cash Flow
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Worksheet 17
Profitability Index Method
1. The initial cash outlay of a project is Rs.50000 and it generates cash inflow of Rs.20000,
Rs.15000, Rs.25000 and Rs.10000 in four years. Using present value index method, appraise
profitability of the proposed investment assuming 10% rate of discount.
1/(1+r)n
1/ (1+0.1)1 = 1/ 1.1 =0.909
1/(1+0.1)2 = 1/1.21 = 0.826
Profitability Index = PV of Cash Inflow
Initial cash Outlay
= = 1.1235
PI (Net) = NPV / Initial cash Outlay
= = 0.1235 OR
Net PI = 1- PI = 1-1.1235 = 0.1235
2. A company is considering an investment proposal involving an initial cash outlay of
Rs20,00,000. The proposal has an expected life of 7 years and zero salvage value. As a required
rate of return of 12%, the proposal has a profitability index of 1.182. Calculate the annual cash
inflows. The present value of an annuity of Re.1 for 7 years at 12% discount is 4.5638.
PI = PV of cash Inflows
Initial Cash Outlay
1.182 = PV of cash Inflows
2000000
PV of cash Inflows = 1.182 X 20,00,000
= Rs.2364000
PV of Cash Inflows = Annual Cash Inflow x PV of an Annuity Factor
23,64,000 = Annual Cash Inflow x 4.5638
Annual Cash Inflow = 2364000/4.5638 = Rs.5,17,989.
Analysis Comprehensive Study
Guide + Exam Questions &
Solutions Graded A+
Professional Academic Assistance Services
Services Offered
• Proctored Exam Assistance
• Online Class Management (Full Course Support)
• Exam Preparation & Study Materials
• Assignments and Coursework Support
• Essay and Research Paper Writing
• Discussion Posts & Responses
• Editing and Proofreading
• Confidential Academic Consultation
Contact Information
Email:
WhatsApp link: https://wa.me/254704846336
Fast Response | Confidential | Reliable Academic
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Helping Students Achieve Academic Excellence
Worksheet 17
Profitability Index Method
1. The initial cash outlay of a project is Rs.50000 and it generates cash inflow of Rs.20000,
Rs.15000, Rs.25000 and Rs.10000 in four years. Using present value index method, appraise
profitability of the proposed investment assuming 10% rate of discount.
1/(1+r)n
1/ (1+0.1)1 = 1/ 1.1 =0.909
1/(1+0.1)2 = 1/1.21 = 0.826
Profitability Index = PV of Cash Inflow
Initial cash Outlay
= = 1.1235
PI (Net) = NPV / Initial cash Outlay
= = 0.1235 OR
Net PI = 1- PI = 1-1.1235 = 0.1235
2. A company is considering an investment proposal involving an initial cash outlay of
Rs20,00,000. The proposal has an expected life of 7 years and zero salvage value. As a required
rate of return of 12%, the proposal has a profitability index of 1.182. Calculate the annual cash
inflows. The present value of an annuity of Re.1 for 7 years at 12% discount is 4.5638.
PI = PV of cash Inflows
Initial Cash Outlay
1.182 = PV of cash Inflows
2000000
PV of cash Inflows = 1.182 X 20,00,000
= Rs.2364000
PV of Cash Inflows = Annual Cash Inflow x PV of an Annuity Factor
23,64,000 = Annual Cash Inflow x 4.5638
Annual Cash Inflow = 2364000/4.5638 = Rs.5,17,989.
