Final Answer:
For every dollar invested in Project B, the company expects to receive a return of $0.40 above the initial investment when the time value of money is considered.
Step-by-step explanation:
To calculate the profitability index (P) for Project B, you simply divide the net present value (NPV) of the project's cash flows by the initial investment required for the project.
The formula for the profitability index is: P = {NPV of cash flows}/{{Initial Investment}
Now, let's calculate the profitability index for Project B with the given values:
The initial investment for Project B is $2,000,000.
The net present value of cash flows for Project B is $800,000.
Applying these values to the formula:
P of Project B = {800,000}/{2,000,000}
To perform the division:
P of Project B = 0.4
Thus, the profitability index for Project B is 0.4.
Complete question:
A company is considering two projects, Project A and Project B. The following information is available for each project:
Project A Project B
Investment $500,000 $2,000,000
Net present value of cash flows $600,000 $800,000
The profitability index for B is: