A project requires a net investment of $100,000. At the firm's cost of capital of 10%, the project's profitability index is 1.15. Determine the net present value of the project.
A) $15,000
B) $215,000
C) $115,000
D) Cannot be determined

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated as the present value of cash inflows minus the net investment. The profitability index (PI) is calculated as the present value of cash inflows divided by the net investment. Given a PI of 1.15 and a net investment of $100,000, the present value of cash inflows is $100,000 * 1.15 = $115,000. Therefore, NPV = $115,000 - $100,000 = $15,000.

A Project Requires a Net Investment of $100,000