An investment that costs $5,000 will produce annual cash flows of $2,000 for a period of 4 years. Given a desired rate of return of 8%, what is the present value index? Use Appendix Table 2. (Do not round your intermediate calculations. Round your answer to three decimal points.)

Question

Quizplus · Accepted Answer

Net present value of cash inflows = Expected cash flows × PV factor for each period
Net present value of cash inflows = $2,000 × 3.312127 = $6,624 (rounded)
PV factor (n = 4, i = 8)
Present value index = Present value of cash inflows ÷ Present value of cash outflows
Present value index = $6,624 ÷ $5,000 = 1.325

An Investment That Costs $5,000 Will Produce Annual Cash Flows