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

We need to calculate the present value of all cash flows and then divide it by the initial investment to calculate the Profitability index.

Year 0: -$10,000 
Year 1: $2,000/1.09 = $1,834.86 
Year 2: $3,000/1.09^2 = $2,519.83 
Year 3: $4,000/1.09^3 = $3,285.91 
Year 4: $5,000/1.09^4 = $4,125.98

Total PV of cash flows: $11,766.58

Profitability Index = PV of cash flows / Initial Investment 
= $11,766.58 / $10,000 
= 1.1767

Therefore, the Profitability Index is 1.02, which is the option D.

Since the Profitability Index is greater than 1, the investment would be considered acceptable, meaning that it would generate a positive net present value. Thus, the best choice would be to invest in this project.

What Is the Profitability Index for an Investment with the Following