Capital rationing. The profitability index for a project is 1.18. If the project will produce cash inflows of $60,000 for the next 12 years, what is the initial outlay for the project if the appropriate discount rate is 5 per cent? (Round to the nearest $10.)
A) $450,670
B) $627,520
C) $1,016,950
D) none of the above

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. Given PI = 1.18 and cash inflows of $60,000 for 12 years at a 5% discount rate, the present value of cash inflows is $532,790. The initial outlay is then $532,790 / 1.18 = $450,670.

Capital Rationing