McKinney Corporation McKinney Corporation is involved in the evaluation of a new computer-integrated manufacturing system.The system has a projected initial cost of $1,000,000.It has an expected life of six years,with no salvage value,and is expected to generate annual cost savings of $250,000.Based on McKinney Corporation's analysis,the project has a net present value of $57,625.
Refer to McKinney Corporation.What is the project's profitability index?

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of future cash flows by the initial investment. In this case, the present value of future cash flows is $1,057,625 (net present value of $57,625 plus initial investment of $1,000,000) and the initial investment is $1,000,000. Therefore, the profitability index is 1.058, indicating that for every dollar invested, the project is expected to generate a return of $1.058. This is a favorable result and suggests that McKinney Corporation should undertake the project.

McKinney Corporation McKinney Corporation Is Involved in the Evaluation of a New