Question

a project requires an investment of $1,400 and has a net present value of $400. if the internal rate of return is 12%, what is the profitability index for the project?

Answer 1

The profitability index for the project which requires an investment of $1,400 and has a net present value of $400 with internal rate of return 12% is 1.286 (rounded).

What is net present value?

It is a method to calculate the current value of a future stream of payments from a company, project, or investment. To calculate NPV, you need to estimate the timing and amount of future cash flows and pick a discount rate equal to the minimum acceptable rate of return.

How to calculate the profitability index for the project?
First, we will use the net present value formula

NPV = Present value of inflows - present value of outflows

400 = present value of inflows - 1400

present value of inflows = 1400 + 400 = 1800

Next, we want to calculate the profitability index to answer the question
Profitability index = present value of inflows / present value of outflows

= (1800 / 1400)
= 1.286 (rounded)

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