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

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of future cash inflows by the initial investment. Here, the present value of future cash inflows includes the net present value (NPV) plus the initial investment, which is $36,224 + $95,000 = $131,224. The initial investment is $95,000. Thus, the profitability index = $131,224 / $95,000 = 1.38.

The Following Information Is Available for a Potential Investment for Panda