Question

13. A company is considering an investment proposal involving an initial cash outlay of
Rs. 45 lakh. The proposal has an expected life of 7 years and zero salvage value. At a
required rate of return of 12%, the proposal has a profitability index of 1.182,
calculate the annual cash inflows.
(Ans. 11.65 Lakh) ​

Answer 1

$PROFITABILITY INDEX = \frac{PRESENT VALUE OF FUTURE CASH FLOWS}{INITIAL INVESTMENT IN PROJECT}$

$1.182 = \frac{PV}{45}$

PV = 53.19

PRESENT  VALUE  OF  FIXED  PERIODIC  CASH  FLOWS  (ANNUITY)  IS  CALCULATED  AS  :  

$PV = C X \frac{1 - (1+R)^{-N} }{R}$

$53.19 = C X \frac{1 - (1 + 0.12)^{-7} }{0.12}$

$53.19 = C X \frac{0.548}{0.12}$

C = 11.65