Adam's Manufacturing has the following information available regarding one of the projects it is considering: The profitability index of this project is:

Question

Adam's Manufacturing has the following information available regarding one of the projects it is considering:  The profitability index of this project is:

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of cash inflows by the initial investment.

Profitability Index = Present Value of Cash Inflows / Initial Investment

From the given information, we can determine: 
Present Value of Cash Inflows = $116,000 
Initial Investment = $100,000

Profitability Index = $116,000 / $100,000 = 1.16

A profitability index greater than 1 indicates that the project is expected to generate positive net present value and should be accepted. Therefore, the best choice for Adam's Manufacturing is to undertake this project.

Adam's Manufacturing Has the Following Information Available Regarding One of the Projects