Question

A new security system has a price-tag of $8,000, but should save your company $3,600 each year for the next 10 years in reduced thefts. What is the profitability index of the security system

Answer 1

If the required rate of return is 7.2%, no such security shall be purchased.

What does the required rate of return mean?

The required rate of return is the expected percentage of returns on investment at the time the investment is made. The required rate of return, in this case, is 7.2%.

The actual returns earned from purchasing the security for $8000 and receiving returns of $3600 are calculated to be around a 3.6% return.

As a result, if the required rate of return on investment is 7.2%, the security should not be purchased.

Read more about the required rate of return here:

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