Question

The management of Dewitz Corporation is considering a project that would require an initial investment of $65,000. No other cash outflows would be required. The present value of the cash inflows would be $72,800. The profitability index of the project is closest to:A. 0.12B. 1.12C. 0.88D. 0.11

Answer 1

Answer:

It is 1.12 (B)

Explanation:

Profitability Index= PV of  Future cash flow/Initial Investment

                            = $72,800/$65,000

                            =1.12

The index is a useful tool for ranking investment projects and making decision most especially when there is limited capital availbal  and all the viable projects cannot be executed. It showed the value created per unit of investment.

Hence, the higher the profitability index, the more attractive the investment is.