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The Mejicano company is planning to purchase a piece of equipment that will reduce annual cash expenses over its 5-year useful life by equal amounts. The company will depreciate the equipment using a straight line method of depreciation based on estimated life of 5 years without any salvage value. The company is subject to a 40 percent tax. The marginal cost of capital for this acquisition is 11.50 percent. the financial analyst calculated that the internal rate of return based on the estimated after-tax calculated cash flows is 12.386 percent and a net present value of 10000. The president, however, wants to know the profitability index before he finally decides. What is the profitability index for this investment.
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