Peterson Inc. has the following information available regarding one of the projects it is considering: The profitability index of this project is:

Question

Peterson Inc. has the following information available regarding one of the projects it is considering:  The profitability index of this project is:

Quizplus · Accepted Answer

To calculate the profitability index, we divide the present value of future cash flows by the initial investment. From the given information, the present value of future cash flows is $800,000 and the initial investment is $600,000. Therefore, the profitability index is $800,000/$600,000 = 1.33. A profitability index greater than 1 indicates that the project is expected to be profitable, so the best choice is to go ahead with the project.