The profitability index is the present value of the future cash flows divided by the initial investment. If you remember, the NPV function really only calculates the present value of future cash flows, so we will use the NPV function divided by the initial investment to calculate the profitability index as follows:

Suppose we have a project with the following cash flows and required return. What is the profitability index of the project?

t	Cash flow
0	$ (30,000)
1	8,000
2	10,000
3	11,000
4	17,000
5	12,000

 

Required return:

12%

 

PI:
Accept or reject:

 

 

 

Answer rating: 100% (QA)

B10 fe B9B2 A B Cash Flow 30000 3 8000 2 10... View the full answer