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%, the investment will generate a present value index of (Do not round your PV factors and intermediate calculations.):

Question

Quizplus · Accepted Answer

To calculate the present value index, we need to divide the present value of the cash flows by the initial investment.

The present value of the cash flows can be calculated using the PV factor for an annuity of $2,000 for 4 years at 8%, which is 3.3121.

Present Value = $2,000 x 3.3121 = $6,624.2

The present value index is therefore:

PV Index = $6,624.2 / $5,000 = 1.325

Therefore, the best choice is D.

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