Using the profitability index method, the present value of cash inflows for Project Flower is $88,000 and the present value of cash inflows of Project Plant is $48,000. If Project Flower and Project Plant require initial investments of $90,000 and $40,000, respectively, and have the same useful life, the project that should be accepted is
A) Project Flower.
B) Project Plant.
C) Either project may be accepted.
D) Neither project should be accepted.

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of cash inflows divided by the initial investment. For Project Flower, PI = $88,000 / $90,000 = 0.98. For Project Plant, PI = $48,000 / $40,000 = 1.2. Since a PI greater than 1 indicates a profitable project, Project Plant should be accepted due to its higher PI.

Using the Profitability Index Method, the Present Value of Cash