Barwood Company is contemplating an investment opportunity costing $500,000. Barwood'smanagement has determined that the investment opportunity's profitability index is 1.15. Which ofthe following statements regarding the investment opportunity is incorrect?

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. A profitability index of 1.15 indicates that for every dollar invested, the company expects to receive $1.15 back in present value terms. This does not directly indicate that the internal rate of return (IRR) is 15%. The IRR is the discount rate that makes the net present value (NPV) of an investment zero, and it can be different from the percentage indicated by the profitability index.

Barwood Company Is Contemplating an Investment Opportunity Costing $500,000