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Calculate the profitability index

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Question - Your firm is considering a proposed project, which lasts three years and has an initial investment of $200,000. The after-tax operating cash flows (OCFs) are estimated at $60,000 for year one, $120,000 for year two, and $135,000 for year three. The firm has a target debt/equity ratio of 1.2. The firm's cost of equity is 14 percent and its cost of debt is 14 percent. The tax rate is 34 percent. Please answer the following:

a. Calculate the profitability index. Should the firm accept the project?

b. Calculate the payback method. Should the firm accept the project?

Reference no: EM133069813

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