Barnacle Bob's Fish and Tackle Shop is planning an expansion.The initial investment is $480,000 and anticipates cash inflows as listed below.The cost of capital is 12.2%.Based on the profitability index, should Barnacle Bob go ahead with the project?
$$\begin{array} { | c | c | }
\hline \text { Years } & \text { Cash Influm } \
\hline 1 & 190,000 \
\hline 2 & 105,000 \
\hline 3 & 105,000 \
\hline 4 & 195,000 \
\hline 5 & 195,000 \
\hline 0 & 195,000 \
\hline
\end{array}$$
A)No, the profitability index is 2.
B)No, the profitability index is .95
C)Yes, the profitability index is 1.18
D)Yes, the profitability index is .78

Question

Barnacle Bob's Fish and Tackle Shop is planning an expansion.The initial investment is $480,000 and anticipates cash inflows as listed below.The cost of capital is 12.2%.Based on the profitability index, should Barnacle Bob go ahead with the project?
$$\begin{array} { | c | c | } 
\hline \text { Years } & \text { Cash Influm } \
\hline 1 & 190,000 \
\hline 2 & 105,000 \
\hline 3 & 105,000 \
\hline 4 & 195,000 \
\hline 5 & 195,000 \
\hline 0 & 195,000 \
\hline
\end{array}$$
A)No, the profitability index is 2.
B)No, the profitability index is .95
C)Yes, the profitability index is 1.18
D)Yes, the profitability index is .78

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of future cash inflows by the initial investment. If the index is greater than 1, the project is considered acceptable. Here, the present value of cash inflows at a 12.2% discount rate results in a profitability index of 1.18, indicating the project should be accepted.

Barnacle Bob's Fish and Tackle Shop Is Planning an Expansion