Question

The following information is available for a potential investment for Panda Company:

Initial investment $95,000
Net annual cash inflow 20,000
Net present value 36,224
Salvage value 10,000
Useful life 10 yrs.
The potential investment's profitability index is
A) 4.75.
B) 3.22.
C) 2.62.
D) 1.38.

Answer 1

The profitability index for the potential investment is approximately 0.3813.

Step-by-step explanation:

The profitability index is calculated by dividing the net present value (NPV) by the initial investment. In this case, the NPV is $36,224 and the initial investment is $95,000.

Profitability index = NPV / Initial investment = $36,224 / $95,000 = 0.3813.

Therefore, the profitability index for the potential investment is approximately 0.3813.