What is the profitability index of a project that has an initial cash outflow of R600, an inflow of R250 for the next 3 years and a cost of capital of 10 percent?
0.667
2.036
1.036
2.739
The profitability index is calculated by dividing the present value of the project's future cash inflows by the initial cash outflow:
PV of future cash inflows = R250 / (1 + 0.10)^1 + R250 / (1 + 0.10)^2 + R250 / (1 + 0.10)^3
PV of future cash inflows = R227.27 + R206.61 + R187.83
PV of future cash inflows = R621.71
Profitability Index = PV of future cash inflows / Initial cash outflow
Profitability Index = R621.71 / R600
Profitability Index = 1.036
Therefore, the profitability index of the project is 1.036.