The following information is available for a potential investment for Panda Company: $$\begin{array} { l r }
\text { Initial investment } & \$ 95,000 \
\text { Net annual cash inflow } & 20,000 \
\text { Net present value } & 36,224 \
\text { Salvage value } & 10,000 \
\text { Useful life } & 10 \text { yrs. }
\end{array}$$ The potential investment's profitability index is
A)4.75.
B)3.22.
C)2.62.
D)1.38.

Question

The following information is available for a potential investment for Panda Company: $$\begin{array} { l r } 
\text { Initial investment } & \$ 95,000 \
\text { Net annual cash inflow } & 20,000 \
\text { Net present value } & 36,224 \
\text { Salvage value } & 10,000 \
\text { Useful life } & 10 \text { yrs. }
\end{array}$$ The potential investment's profitability index is
A)4.75.
B)3.22.
C)2.62.
D)1.38.

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. Given the net present value (NPV) of $36,224 and the initial investment of $95,000, the total present value of future cash flows is $95,000 + $36,224 = $131,224. The profitability index is $131,224 / $95,000 = 1.38.

The Following Information Is Available for a Potential Investment for Panda