You are an employee of University Consultants, Ltd., and have been given thefollowing assignment. You are to present an investment analysis of a new smallresidential income producing property for sale to a potential investor. The asking price forthe property is $1,250,000; rents are estimated at $200,000 during the first year and areexpected to grow at 3 percent per year thereafter. Vacancies and collection losses areexpected to be 10 percent of rents. Operating expenses will be 35 percent of effectivegross income. A 70 percent loan can be obtained at 11 percent interest for 30 years. Theproperty is expected to appreciate in value at 3 percent per year and is expected to beowned for five years and then sold.

What is the profitability index using a 14% discount rate? What does this mean?