Determine the project's NPV if the Profitability Index is 1.4; and the investment value is $500,000.
A)$25,000
B)$75,000
C)$200,000
D)$250,000

Question

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. A PI of 1.4 means that for every $1 invested, the project returns $1.40. Therefore, if the investment value is $500,000, the present value of future cash flows would be 1.4 times that amount, which is $700,000. The NPV is the present value of future cash flows minus the initial investment, so $700,000 - $500,000 = $200,000.

Determine the Project's NPV If the Profitability Index Is 1