A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is
A) $78,400.
B) $86,730.
C) $56,497.
D) $70,000.

Question

Quizplus · Accepted Answer

Since the project has a profitability index greater than 1, it is profitable. 
Profitability Index = (Present Value of Net Cash Flows / Initial Investment)
1.239 = (Present Value of Net Cash Flows / $70,000)
Present Value of Net Cash Flows = 1.239 x $70,000 = $86,730
Additionally, we are told that the project has an internal rate of return of 12%. This means that the project's cash inflows and outflows will produce a net present value (NPV) of zero when discounted at a rate of 12%. This also confirms that the present value of net cash flows is greater than the initial investment of $70,000. Therefore, the present value of net cash flows is $86,730.

A Project with an Initial Investment of $70,000 and a Profitability