The following details are provided by Dopler Company: Which project has the highest profitability index?

Question

The following details are provided by Dopler Company:  Which project has the highest profitability index?

Quizplus · Accepted Answer

To determine the profitability index (PI) for each project, we first need to calculate the present value of each project's cash inflows using the given information:

Project A: PV of cash inflows = $20,000/(1+0.1) + $25,000/(1+0.1)^2 + $30,000/(1+0.1)^3 = $62,371.90
PI = PV of Cash Inflows/Initial Investment = $62,371.90/$50,000 = 1.247

Project B: PV of cash inflows = $22,000/(1+0.12) + $26,000/(1+0.12)^2 + $28,000/(1+0.12)^3 = $73,482.53
PI = PV of Cash Inflows/Initial Investment = $73,482.53/$60,000 = 1.225

Project C: PV of cash inflows = $18,000/(1+0.09) + $18,000/(1+0.09)^2 + $18,000/(1+0.09)^3 + $18,000/(1+0.09)^4 + $18,000/(1+0.09)^5 = $79,230.81
PI = PV of Cash Inflows/Initial Investment = $79,230.81/$70,000 = 1.132

Project D: PV of cash inflows = $25,000/(1+0.11) + $25,000/(1+0.11)^2 + $25,000/(1+0.11)^3 = $66,025.78
PI = PV of Cash Inflows/Initial Investment = $66,025.78/$65,000 = 1.017

Therefore, Project B has the highest profitability index of 1.225, making it the best choice.

The Following Details Are Provided by Dopler Company: Which