3

a.

Consider a project for the Eliana, Inc. with the following cash flows:

Year After-tax Cash Flow

1 $ 750

2 1,000

3 1,200

Initial outlay = $1,500

Compute the profitability index if the company's discount rate is 10%.

I.

1.81

II.

1.61

III.

None of the above

IV.

15.8

V. 0.62

b.

Lauren is evaluating a project with the following cash flows. Compute the payback period for this project.

Year Cash Flows

0 -$20,000

1 $6,000

2 $6,000

3 $3,000

4 $3,000

5 $3,000

	I.	5 years
	II.	3 1/3 years
	III.	None of the above
	IV.	4 1/3 years
	V.	4 2/3 years