Floyd Clymer Is the CFO of Bonavista Mustang, a Manufacturer

Multiple Choice

Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the firm to stamp out auto
Fenders. The equipment costs $250,000. The project is expected to produce after-tax cash flows of
$60,000 the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach
$100,000. Liquidation of the equipment will net the firm $10,000 in cash at the end of five years,
Making the total cash flow in year five $110,000.
Assuming a required return is 15%, what is the project's profitability index?

A) 0.98
B) 1.01
C) 1.06
D) 1.12
E) 1.28