A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's 12% cost of capital. Determine the net present value of the project.
A) $112,500
B) $562,500
C) $1,012,500
D) $140,625

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by subtracting the net investment from the present value of cash inflows. The profitability index (PI) is defined as the present value of future cash flows divided by the initial investment. Given a PI of 1.25, this means the present value of future cash flows is 1.25 times the initial investment of $450,000, which equals $562,500. The NPV is then calculated as $562,500 (total present value of future cash flows) - $450,000 (initial investment) = $112,500.

A Project Requires a Net Investment of $450,000