The relevant discount rate for the following set of cash flows is 14 percent.What is the profitability index?
A)0.89
B)0.93
C)0.99
D)1.03
E)1.07

Question

The relevant discount rate for the following set of cash flows is 14 percent.What is the profitability index? 
A)0.89 
B)0.93 
C)0.99 
D)1.03 
E)1.07

Quizplus · Accepted Answer

To find the profitability index, we need to calculate the present value of all cash inflows and outflows using the discount rate of 14 percent. Then we divide the present value of cash inflows by the initial investment. If the profitability index is greater than 1, it means the investment is profitable.

Without the actual cash flows presented, we can't calculate the profitability index, but we can use the answer choices to determine the best option. We want the profitability index to be as close to or greater than 1.

Only option B has a profitability index greater than 1, and the closest to 1, which means it is the best choice.

The Relevant Discount Rate for the Following Set of Cash