What is the profitability index for an investment with the following cash flows given a 9% required return?
$\begin{array}{|l|l|}
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & -£ 21,500 \
\hline 1 & £ 7,400 \
\hline 2 & £ 9,800 \
\hline 3 & £ 8,900 \
\hline
\end{array}$
A).96
B).98
C)1.00
D)1.02
E)1.04

Question

Quizplus · Accepted Answer

To calculate the profitability index (PI), we need to find the present value of each cash flow and then divide the sum of present values by the initial investment. Using a financial calculator or a spreadsheet, we can find the present values as follows:

PV of year 1 cash flow = 7,400 / (1 + 0.09)^1 = £6,789.17
PV of year 2 cash flow = 9,800 / (1 + 0.09)^2 = £7,547.02
PV of year 3 cash flow = 8,900 / (1 + 0.09)^3 = £6,651.87
PV of initial investment = -21,500

PI = (PV of cash flows / PV of initial investment) = (6,789.17 + 7,547.02 + 6,651.87) / 21,500 = 1.02

Since the PI is greater than 1, the investment is acceptable. Among the given answer choices, the closest one to 1.02 is D) 1.02, which is the correct answer. Therefore, the best choice is D) 1.02.

What Is the Profitability Index for an Investment with the Following