The net present value of a project's cash inflows is $2,716 at a discount rate of 12 percent.The profitability index is 1.09 and the firm's tax rate is 34 percent.What is the initial cost of the project?
A)$2,314.07
B)$2,018.50
C)$2,428.32
D)$2,491.74
E)$2,066.67

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash inflows divided by the initial investment. Given PI = 1.09 and NPV = $2,716, we can set up the equation: 1.09 = (PV of inflows) / Initial Cost. Since NPV = PV of inflows - Initial Cost, we have $2,716 = (1.09 * Initial Cost) - Initial Cost. Solving for Initial Cost gives $2,491.74.

The Net Present Value of a Project's Cash Inflows Is