A project has an initial investment of $150,000. Its four year cash inflows are estimated to be $50,000 in year 1, $80,000 in years 2 and 3, and $50,000 in year 4. If the rate of return is 12%, calculate the project's Profitability Index.
A) 1.31
B) 1.41
C) 1.51
D) 1.61
E) 1.71

Question

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated by dividing the present value of future cash inflows by the initial investment. The present value of cash inflows at a 12% discount rate is approximately $196,500. Dividing this by the initial investment of $150,000 gives a PI of approximately 1.31.

A Project Has an Initial Investment of $150,000