The addition of 4% inflation makes the investment unfavorable at a hurdle rate of 20%.
The column labeled “Used” indicates the cash flow value used to calculate the net present value.
The profitability index is the sum of the discounted cash flows divided by the initial investment. For this problem it is the sum of the PV's for years 1-4 divided by $65,000 or:
Since the value it greater than one, the project should be accepted.
Now the column labeled “Inflation” has been added. Each of these cells is individually calculated by Crystal Ball® with a normal distribution using a standard deviation of 0.33% to allow different inflation values for each year. The result is added to the “PVIF” calculation used to determine the individual PV results.
Now the forecast values for NPV look like this:
The probability that the NPV ...