We-Know-Widgets,Inc.is analyzing a project that requires an initial investment of $10,000,followed by cash inflows of $1,000 in Year 1,$4,000 in Year 2,and $15,000 in Year 3.The cost of capital is 10%.What is the profitability index of the project?
A)1.04
B)1.55
C)1.78
D)1.97

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash inflows divided by the initial investment. The present value of cash inflows is $1,000/(1+0.10)^1 + $4,000/(1+0.10)^2 + $15,000/(1+0.10)^3 = $909.09 + $3,305.79 + $11,282.64 = $15,497.52. The PI is $15,497.52 / $10,000 = 1.55.