The following information is available for a potential investment for Panda Company: $\begin{array}{lr}
\text { Initial investment } & \$ 40,000 \
\text { Net annual cash inflow } & 10,000 \
\text { Net present value } & 18,112 \
\text { Salvage value } & 5,000 \
\text { Useful life } & 10 \text { yrs. }
\end{array}$ The potential investment's profitability index is

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. Given the net present value (NPV) is $18,112 and the initial investment is $40,000, the present value of future cash flows is $40,000 + $18,112 = $58,112. Thus, the profitability index is $58,112 / $40,000 = 1.45.

The Following Information Is Available for a Potential Investment for Panda