The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:
A)0.139
B)0.320
C)0.500
D)0.861

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of the future cash flows divided by the initial investment. In this case, the present value of the future cash flows is $40,000 * (1 - 1 / (1 + 0.12)^4) / 0.12 = $32,000. Therefore, the profitability index is $32,000 / $40,000 = 0.8.

The Profitability Index for a Project Costing $40,000 and Returning