The management of Hibert Corporation is considering three investment projects-W, X, and Y. Project W would require an investment of $21,000, Project X of $66,000, and Project Y of $95,000. The present value of the cash inflows would be $22,470 for Project W, $73,920 for Project X, and $98,800 for Project Y. (Ignore income taxes.)Rank the projects according to the profitability index, from most profitable to least profitable.
A) Y, W, X
B) X, Y, W
C) X, W, Y
D) W, Y, X

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of cash inflows divided by the initial investment. Therefore, the profitability index for Project W is 22,470/21,000 = 1.07, for Project X it is 73,920/66,000 = 1.12, and for Project Y it is 98,800/95,000 = 1.04. With the highest profitability index, Project X is the most profitable investment, followed by Project W, and then Project Y. Therefore, the correct ranking is X, W, Y.

The Management of Hibert Corporation Is Considering Three Investment Projects-W