What is the profitability index for an investment with the following cash flows given a 9% required return?

A) .96
B) .98
C) 1.00
D) 1.02
E) 1.04

Question

What is the profitability index for an investment with the following cash flows given a 9% required return?

A) .96 
B) .98 
C) 1.00 
D) 1.02 
E) 1.04

Quizplus · Accepted Answer

To calculate the profitability index, we divide the present value of cash inflows by the initial investment. Using a financial calculator, spreadsheet or PV tables, the present value of the cash flows is $10,918.09, and the initial investment is $10,700. Therefore, the profitability index is $10,918.09/$10,700 = 1.02. The best choice is D, as it has the highest profitability index, indicating that the investment will generate a return higher than the required rate of 9%.

What Is the Profitability Index for an Investment with the Following