Nodak,Inc.is currently considering an eight-year project that has an initial outlay or cost of $160,000.The cash inflows from its project for years 1 through 5 are the same at $55,000.Nodak has a discount rate of 11%.Because there is a shortage of funds to finance all good projects,Nodak wants to compute the profitability index (PI)for each project.That way Nodak can get an idea as to which project might be a better choice.What is the PI for Nodak's current project?
A)About 1.27
B)About 1.24
C)About 1.19
D)About 1.09

Question

Quizplus · Accepted Answer

To calculate the profitability index (PI) of the project, we need to find the present value of cash inflows and divide it by the initial outlay. 
PV of cash inflows for years 1-5 = $55,000(PVIFA 11%,5 years) = $55,000(3.696) = $203,280. 
PI = PV of cash inflows/Initial outlay = $203,280/$160,000 = 1.27. 
Therefore, the PI for Nodak's current project is about 1.27.

Based on the PI, Nodak should choose the current project as it has a higher PI than 1. Any project with a PI greater than 1 is financially viable, and the higher the PI, the more profitable the project. Therefore, the best choice for Nodak is to choose the current project.

Nodak,IncIs Currently Considering an Eight-Year Project That Has an Initial