(Ignore income taxes in this problem.) The management of Dittrick Corporation is considering the following three investment projects: Rank the projects according to the profitability index, from most profitable to least profitable.

Question

(Ignore income taxes in this problem.) The management of Dittrick Corporation is considering the following three investment projects:  Rank the projects according to the profitability index, from most profitable to least profitable.

Quizplus · Accepted Answer

The profitability index is calculated as the present value of net cash inflows divided by the initial investment. Based on the information given, we can calculate the profitability index for each project as follows:

Project I: PV of net cash inflows = $9,000, initial investment = $7,500, so PI = 1.2
Project J: PV of net cash inflows = $8,000, initial investment = $6,000, so PI = 1.33
Project K: PV of net cash inflows = $15,000, initial investment = $11,000, so PI = 1.36

Therefore, the projects ranked in order of profitability index from highest to lowest are: K, J, I. Thus, Option C is the correct choice.

(Ignore Income Taxes in This Problem