A firm, which uses a discount rate of 10 percent, has an opportunity to invest in the project with only one positive future cash flow of $150,000. Approximately, what is the profitability index of the project if the initial cost is $125,000?

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. Here, the future cash flow is $150,000, and the initial cost is $125,000. Using a discount rate of 10%, the present value (PV) of the future cash flow is $150,000 / (1 + 0.10) = $136,363.64. Thus, the PI = $136,363.64 / $125,000 = 1.09, which rounds to approximately 1.1.

A Firm, Which Uses a Discount Rate of 10 Percent