Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's profitability index?
A) 1.21
B) 1.26
C) 1.43
D) 1.69

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of the cash flows by the initial investment. The present value of the cash flows is calculated by discounting each cash flow back to the present at the discount rate. The present value of the cash flows is $1,123,500. The profitability index is $1,123,500 / $920,000 = 1.21.

Your Firm Is Considering an Investment That Will Cost $920,000