A project's Profitability Index is.85 and its investment value of $250,000.Given this information, determine its NPV.
A)$12,500
B)-$5,000
C)-$12,500
D)-$37,500

Question

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. A PI of .85 means that for every $1 invested, the project returns 85 cents. To find the NPV, you subtract the initial investment from the present value of future cash flows. Since the PI is .85, the project returns $212,500 ($250,000 * .85) on a $250,000 investment. The NPV is therefore $212,500 - $250,000 = -$37,500.

A Project's Profitability Index Is