What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

A)0.94
B)0.98
C)1.02
D)1.06
E)1.11

Question

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

A)0.94 
B)0.98 
C)1.02 
D)1.06 
E)1.11

Quizplus · Accepted Answer

To calculate the profitability index, we need to divide the present value of the cash inflows by the initial investment. Using a financial calculator or spreadsheet software, we can calculate the present value of the cash flows:

Year 1: $300 / (1+0.145)^1 = $260.87
Year 2: $400 / (1+0.145)^2 = $310.92
Year 3: $500 / (1+0.145)^3 = $345.29

PV of cash inflows = $260.87 + $310.92 + $345.29 = $917.08

Now, we need to divide the present value of cash inflows by the initial investment:

Profitability Index = $917.08 / $900 = 1.02

Since the profitability index is greater than 1, the investment is expected to be profitable. Therefore, the best choice is C) 1.02.

What Is the Profitability Index for an Investment with the Following