The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:
A)0.139
B)0.320
C)0.500
D)0.861 PV = 15,000

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of the future cash flows divided by the initial investment. In this case, the present value of the future cash flows is $45,639.20 and the initial investment is $40,000. Therefore, the profitability index is 1.141, which is closest to choice A, 0.139.

The Profitability Index for a Project Costing $40,000 and Returning