(Ignore income taxes in this problem.) The management of Cerra Corporation is considering three investment projects I, J, and K. Project I would require an investment of $18,000, Project J of $42,000, and Project K of $85,000. The present value of the cash inflows would be $19,260 for Project I, $45,780 for Project J, and $91,800 for Project K.
-Rank the projects according to the profitability index, from most profitable to least profitable.

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of cash inflows divided by the initial investment. For Project I: 19,260/18,000 = 1.07; Project J: 45,780/42,000 = 1.09; Project K: 91,800/85,000 = 1.08. Ranking them gives J (1.09), K (1.08), I (1.07).

(Ignore Income Taxes in This Problem