Question

What is the profitability index for an investment with the following cash flows: -46,500; 12,200; 38,400; 6,300, given a 14.5 percent required return?

Group of answer choices 0.949 0.992 1.021 1.035 1.093

Answer 1

Whenever npv is greater than zero we get profitability index more than one. When npv is less than zero, we get profitability index less than one.

The formula for profitability index is

(1+(npv/initial investment))

The initial investment used in formula above is just the number and we do not take it as negative.

The next step is to calculate npv

Npv= -46500 + 12200/(1.145) + 38400/(1.145^2) + 6300/(1.145^3)

Thus npv = -2358.06

Now the initial investment is 46500. We apply the formula for profitability index

(1+(-2358.06/46500)) = 0.949

Thus first option of 0.949 is correct