What is the profitability index of an investment with cash flows in years 0 thru 4 of -340, 120, 130, 153, and 166, respectively, and a discount rate of 16 percent?
A).15
B).22
C).35
D).42

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of the future cash flows by the initial investment. The present value of the future cash flows is calculated by multiplying each cash flow by the discount factor, which is calculated by raising the discount rate to the power of the number of years in the future. In this case, the present value of the future cash flows is:PV = -340 + 120/(1.16^1) + 130/(1.16^2) + 153/(1.16^3) + 166/(1.16^4) = 15.00The profitability index is then calculated by dividing the present value of the future cash flows by the initial investment, which is -340:PI = PV/Initial Investment = 15.00/-340 = 0.0441Therefore, the profitability index is 0.0441, which is closest to choice A, 0.15.

What Is the Profitability Index of an Investment with Cash