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Based upon the following data: calculate the Profitability Index. Cost = $325Present value of future cash flows = $350

Question

Based upon the following data: calculate the Profitability Index. Cost = 325Presentvalueoffuturecashflows=325Present value of future cash flows = 350

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Solution

The Profitability Index (PI) is calculated by dividing the present value of future cash flows by the initial investment cost.

Here's the step-by-step calculation:

  1. Identify the present value of future cash flows. In this case, it's $350.
  2. Identify the initial investment cost. In this case, it's $325.
  3. Divide the present value of future cash flows by the initial investment cost to get the Profitability Index.

So, PI = Present value of future cash flows / Cost PI = 350/350 / 325 PI = 1.0769

So, the Profitability Index is 1.0769. This means that for every dollar invested, we expect to get back about $1.08.

This problem has been solved

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