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

To calculate the profitability index, we need to find the present value of all cash flows and divide by the initial investment. Using a financial calculator or Excel, we get:

PV of cash flows = -$1,000 + $400/1.09 + $500/1.09^2 + $600/1.09^3 = $1,153.93
Profitability index = $1,153.93 / $1,000 = 1.15

Therefore, the answer is D) 1.02, as it is the closest option to the calculated profitability index of 1.15. A profitability index greater than 1 indicates that the investment is worthwhile, while a profitability index less than 1 would not be recommended.

What Is the Profitability Index for an Investment with the Following