What is the profitability index for investment

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Reference no: EM132023891

1. Kathy has been presented with an investment opportunity which will yield end-of-year cash flows of $34,000 per year in Years 1 through 4, $40,000 per year in Years 5 through 9, and $48,000 in Year 10. This investment will cost the firm $260,000 today, and the firm's cost of capital is 5%. What is the profitability index for this investment?

a. 1.48

b. 1.13

c. 1.36

d. 1.05

e. 0.91

f. 0.42

g. 0.48

2. The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition, the net cash flows from rental operations, the net cash flows from the eventual sale of the property, and the ultimate return on invested equity. Assuming the going-in IRR is greater than the effective borrowing cost, if an investor increases his leverage rate, say from 75% to 80%, we would expect which of the following to occur?

Both NPV and going-in IRR increase

NPV decreases, while going-in IRR increases

NPV increases, while going-in IRR decreases

Both NPV and going-in IRR decrease

Reference no: EM132023891

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