Collins Company is considering the purchase of a new machine. The initial investment in the machine was $39,000 and the present value of net cash inflows is $45,500. The profitability index is:

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of net cash inflows divided by the initial investment. 
Profitability index = $45,500/$39,000 = 1.17 
A profitability index greater than 1 indicates that the investment is expected to generate a positive return, so the best choice is to go ahead with the purchase.

Collins Company Is Considering the Purchase of a New Machine