Determine the projects profitability index


Question:

Mr. M is the CFO of XYZ company, a manufacture of parts for classic cars. Mr. M is considering the purchase of two-ton press which will allow the firm to stamp out auto fenders. The equipment costs $265,000. The project is expected to produce after tax cash flows of $70,000 the first year, and an increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation of the equipment will bet the for $10,000 in cash in the end of 5 years, making the cash flow in year 5 $110,000.

Assume the required of return is 15%. What is the projects profitability index?

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Finance Basics: Determine the projects profitability index
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