A certain project has a net present value of $3,200. The only cash outflow is the initial investment of $17,000. What is the project's profitability index? Round your answer to the
Nearest hundredth.
A)1.23
B)0.19
C)1.19
D)0.81

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of the cash inflows by the initial investment. In this case, the present value of the cash inflows is $20,200 ($17,000 initial investment + $3,200 net present value). So the profitability index is 20,200/17,000 = 1.19. A profitability index greater than 1 indicates that the project is profitable, so in this case, the best choice is to undertake the project. The profitability index is calculated as the present value of cash inflows divided by the initial investment. 
Profitability index = (Net present value + Initial investment) / Initial investment 
Profitability index = (3200 + 17000) / 17000 
Profitability index = 1.19 
Therefore, the best choice is C.

A Certain Project Has a Net Present Value of $3,200