Computer Information Systems

Profitability Index (PI) is a metric used to assess the attractiveness of a project or investment. It is calculated as the ratio of the present value of future cash flows to the initial investment. Steps to calculate PI: Calculate the present value of future cash flows for each project: Project A: Year 1: $130 / (1 + 0.10)^1 = $118.18 Year 2: $130 / (1 + 0.10)^2 = $107.44 Year 3: $130 / (1 + 0.10)^3 = $97.67 Year 4: $130 / (1 + 0.10)^4 = $88.79 Project B: Year 1: $150 / (1 + 0.10)^1 = $136.36 Year 2: $150 / (1 + 0.10)^2 = $123.97 Year 3: $150 / (1 + 0.10)^3 = $112.69 Year 4: $150 / (1 + 0.10)^4 = $102.45 Sum the present values of cash flows for each project: Project A: $118.18 + $107.44 + $97.67 + $88.79 = $412.08 Project B: $136.36 + $123.97 + $112.69 + $102.45 = $475.47 Calculate the profitability index for each project: Project A: $412.08 / $250 = 1.6483 Project B: $475.47 / $250 = 1.9019 Interpretation: Project A: The profitability index is 1.6483, which means that for every dollar invested in Project A, we can expect to generate $1.6483 in present value of future cash flows. Project B: The profitability index is 1.9019, which means that for every dollar invested in Project B, we can expect to generate $1.9019 in the present value of future cash flows. Conclusion: Based on the profitability index, Project B is more attractive than Project A as it generates a higher return for each dollar invested.

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Anu Bhardwaj

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