What is the profitability index for an investment with the following cash flows given a 9% required return?
A).96
B).98
C)1.00
D)1.02
E)1.04

Question

What is the profitability index for an investment with the following cash flows given a 9% required return? 
A).96 
B).98 
C)1.00 
D)1.02 
E)1.04

Quizplus · Accepted Answer

To calculate the profitability index, we need to divide the present value of cash inflows by the initial investment. Using a financial calculator or excel, we find that the present value of cash inflows is $10,200 and the initial investment is $10,000. Therefore, the profitability index is 1.02 (10,200/10,000). A profitability index greater than 1 indicates that the investment will generate positive net present value and is therefore acceptable. Since only one choice is greater than 1, the best choice is D) 1.02.

What Is the Profitability Index for an Investment with the Following