Corp Suite is considering two expansion options, but does not have enough capital to undertake both.Project W requires an investment of $100,000 and has an NPV of $10,000.Project D requires an investment of $80,000 and has an NPV of $8200.If Corp Suite uses the profitability index to decide, it would
A)choose D because it has a higher profitability index.
B)choose W because it has a higher profitability index.
C)choose D because it has a lower profitability index.
D)choose W because it has a lower profitability index.

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the ratio of the present value of future cash flows (or NPV + initial investment) over the initial investment. For Project W, PI = (110,000 / 100,000) = 1.1. For Project D, PI = (88,200 / 80,000) = 1.1025. Project D has a higher PI, making it the preferred choice.

Corp Suite Is Considering Two Expansion Options, but Does Not