What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?
A)0.94
B)0.98
C)1.02
D)1.06
E)1.11

Question

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return? 
A)0.94 
B)0.98 
C)1.02 
D)1.06 
E)1.11

Quizplus · Accepted Answer

To calculate the profitability index (PI), we need to divide the present value of the cash inflows by the initial investment.

The present value of the cash inflows can be calculated using a financial calculator or excel, and we get a value of $26,245.

The initial investment is given as $25,800.

Thus, PI = $26,245 / $25,800 = 1.02

A PI greater than 1 indicates that the project is expected to be profitable and thus, the investment should be accepted. Therefore, C) 1.02 is the best choice.

What Is the Profitability Index for an Investment with the Following