Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The profitability index for Project B is
A) 1.55.
B) 1.48.
C) 1.39.
D) 1.33.

Question

Quizplus · Accepted Answer

The profitability index for Project B is 1.55. This is calculated by dividing the present value of the project's cash flows by the initial investment. The present value of the project's cash flows is $186,000, and the initial investment is $120,000. Therefore, the profitability index is 1.55.