The following information is available for a potential investment for Panda Company: $$\begin{array} { l l }
\text { Initial investment } & \$ 40,000 \
\text { Net annual cash inflow } & 10,000 \
\text { Net present value } & 18,112 \
\text { Salvage value } & 5,000 \
\text { Useful life } & 10 \text { yrs. }
\end{array}$$ The potential investment's profitability index is

Question

The following information is available for a potential investment for Panda Company: $$\begin{array} { l l } 
\text { Initial investment } & \$ 40,000 \
\text { Net annual cash inflow } & 10,000 \
\text { Net present value } & 18,112 \
\text { Salvage value } & 5,000 \
\text { Useful life } & 10 \text { yrs. }
\end{array}$$ The potential investment's profitability index is

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. Here, the present value of future cash flows is the sum of the net present value and the initial investment, which equals $18,112 + $40,000 = $58,112. The initial investment is $40,000. Therefore, the profitability index = $58,112 / $40,000 = 1.45.

The Following Information Is Available for a Potential Investment for Panda