Calculate profitability index-Study One-Topic 2

Calculate profitability index

Calculate the profitability index of the three projects below using the Money-Zine profitability index calculator.

Note: For time periods greater than one year, the total cash flow from investment must be divided by the number of time periods. For example, if the total cash flow from investment is $50,000 for a two year project, then the cash flow for each of the two time periods is $25,000.

	Project 1	Project 2	Project 3
Investment	67,000	72,000	127,000
Life of the machine (number of time periods)	5 years	3 years	20 years
Opportunity cost	10%	12%	9%
Total cash flow	108,000	81,000	812,000

Rank the projects:

First divide both the investment & total cash flow by the number of time periods and then do equations from there.

• Project 1: 1.47-Do it
• Project 2: 0.001-Don't do it
• Project 3: 5.9 Do it