Dizzyland Enterprises has been presented with an investment opportunity that will yield end-of-year cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $150,000 today,and the firm's cost of capital is 10%.What is the profitability index for this investment?

Question

Quizplus · Accepted Answer

To calculate the profitability index, we need to divide the present value of the investment's cash inflows by the initial investment amount. We can use a financial calculator or spreadsheet to calculate the present value of each cash flow and add them up to find the total present value of the investment's cash inflows, which is $228,936. Then, dividing by the initial investment of $150,000, we get a profitability index of 1.53. Therefore, choice A, 1.34, is the best choice available.

Dizzyland Enterprises Has Been Presented with an Investment Opportunity That