Company XYZ is evaluating a project that generates revenue of $200,000 per year for 10 years. The variable costs are 60% of the revenue. Fixed costs are $15,000. The equipment cost is $150,000. There net working capital will increase by $10.000 which will be reset at the end of the project. The equipment will be depreciated under straight-line method. The equipment can be sold for $25,000 at the end of the project. The risk of the project is above the average risk.

The company pays tax at 38%. The assets of the company financed by equity only. The company expected to pay $2.00 of dividend per share which grows at the rate of 4% per year forever.

The current price of the stock is $28.

The company makes below adjustments to adjust the risk of the projects:

Rate of 2.5% more is required by the high risky projects.

Low risky project should be evaluated at the rate less than the cost of capital. The required rate of return for such projects will be reduced by 1.5%.

What is the profitability index of the project?