$$\begin{array}{l}
\text { You are analyzing a project and have prepared the following data: }\
\begin{array} { | l | l | }
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - £ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £ 41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}
\end{array}$$ Required payback period: 2.5 years Required AAR: 7.25%
Required return: 8.50%
Based on the proﬁtability index of _____ for this project, you should _____ the project.
A).97; accept
B)1.05; accept
C)1.18; accept
D).97; reject
E)1.05; reject

Question

$$\begin{array}{l}
\text { You are analyzing a project and have prepared the following data: }\
\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - £ 169,000 \
\hline 1 & £ 46,200 \
\hline 2 & £ 87,300 \
\hline 3 & £ 41,000 \
\hline 4 & £ 39,000 \
\hline
\end{array}
\end{array}$$ Required payback period: 2.5 years Required AAR: 7.25%
Required return: 8.50%
Based on the proﬁtability index of _____ for this project, you should _____ the project.
A).97; accept
B)1.05; accept
C)1.18; accept
D).97; reject
E)1.05; reject

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial investment. Given the required return of 8.50%, we calculate the present value of future cash flows and compare it to the initial investment of £169,000. A PI greater than 1 indicates that the NPV is positive, suggesting the project should be accepted. The correct PI and action based on the provided options and the context of profitability index would logically be to accept if the PI is greater than 1, which aligns with option B.

Required Payback Period: 2