A capital budgeting project has a net investment of $250,000 and is expected to generate net cash flows of $90,000 annually for 5 years. What is the profitability index at a 13% required rate of return?
A)1.27
B)1.80
C)1.24
D)1.30

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial investment. First, calculate the present value of the net cash flows: PV = $90,000 * [(1 - (1 + 0.13)^-5) / 0.13] = $90,000 * 3.5171 = $316,539. Then, calculate the PI: PI = $316,539 / $250,000 = 1.27.

A Capital Budgeting Project Has a Net Investment of $250,000