The management of Hibert Corporation is considering three investment projects-W, X, and Y. Project W would require an investment of $21,000, Project X of $66,000, and Project Y of $95,000. The present value of the cash inflows would be $22,470 for Project W, $73,920 for Project X, and $98,800 for Project Y. (Ignore income taxes.)The profitability index of investment project X is closest to:
A) 0.11
B) 0.88
C) 1.12
D) 0.12

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of cash inflows divided by the initial investment.

For Project W, PI = 22,470 / 21,000 = 1.07 
For Project X, PI = 73,920 / 66,000 = 1.12 
For Project Y, PI = 98,800 / 95,000 = 1.04

Therefore, Project X has the highest profitability index and is the best choice for investment.

The Management of Hibert Corporation Is Considering Three Investment Projects-W