Question

The following information is provided by Doppler SystemsProject A Project B Project C Project DInitial investment $426,000 $214,000 $558,000 $516,000PV of cash inflows $584,000 $382,000 $806,000 $390,000Payback period (years) 3.6 3.2 4.0 2.0NPV of project $158,000 $168,000 $248,000 $126,000Calculate the profitability index for Project A. (Round your answer to two decimal places.)

Answer 1

The profitability index for Project A is 1.37

Step-by-step explanation:

Since in the question, the NPV amount is given for all projects through which we can compute the profitability index. The formula to calculate the profitability index is computed by two methods which are shown below:

Profitability index for Project A equals to

Method 1

= Initial investment of Project A + NPV of project A ÷ Initial investment of Project A

= $426,000 + $158,000 ÷ $426000

= $584,000 ÷ $426,000

= 1.37

Method 2

= Present values of project A ÷ Initial investment of Project A

= $584,000 ÷ $426,000

= 1.37

The payback period is irrelevant. Thus, it is ignored.

Hence, the profitability index for Project A is 1.37