Answer to Question #188458 in Finance for Daniel Quansah

Question

The management found suitable office to buy with a purchase cost of 

GHC1,000,000.00; however, 2 years ago, the company lost GHC150,000.00 on similar project which failed. 

The company wants to use needs refurbishment before occupation at a cost of GHC250, 000.00 and there will 

be annual rates and utility costs payable from year 1 of GHC70,000.00. The company will have static annual 

employee costs of GHC135,000.00 together with other identified fixed annual overheads of GHC100,000.00

per annum.

Ann Marketing Ltd expects to generate sales from 2 new customers each week in year 1 at an average invoice 

value of GHC5,000.00. The company’s business plan suggests that, the annual total revenue of year 1 will 

increase at 10% per annum from year 2 to 5 without any additional expenditure requirement.

The company has a cost of capital of 8% and a Return of Capital Employed (ROCE) of 15%. Assuming that, 

all cash movement will align with profitability.

Answer 1

Profitability index (PI) of the company

$PI=\frac{PV of future cash flows}{initial investment}$

Answer: Profitability index = 1.05

since, PI is greater than 1 it is considered a good investment.