Richardson Corporation has the following information available regarding one of the projects it is considering:
$\begin{array}{lr}
\text { Initial investment} &\$800000\
\text { Net present value } &\$100000\
\end{array}$

The profitability index of this project is:

Question

Richardson Corporation has the following information available regarding one of the projects it is considering:
$\begin{array}{lr}
  \text {  Initial investment} &\$800000\
 \text { Net present value } &\$100000\
\end{array}$

The profitability index of this project is:

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of cash inflows by the initial investment. In this case, the present value of cash inflows is $1,125,000 ($500,000 x 2.25) and the initial investment is $1,000,000. Therefore, the profitability index is 1.125 (1,125,000/1,000,000). A profitability index greater than 1 indicates that the project is expected to be profitable and should be accepted. Choice B is the only option greater than 1, so it is the best choice.

Richardson Corporation Has the Following Information Available Regarding One of the Projects