Question

Mick's pub's is considering expanding the number of restaurants it owns. if it decides on the expansion, it will invest $2,300,000, and the npv of the project is $900,000. what is the profitability index of the project?

a. 0.39
b. 0.57
c. 1.39
d. 1.57

Answer 1

The Profitability Index of Mick's Pub's potential expansion is calculated to be 1.39, which is found by dividing the sum of the NPV and the initial investment by the initial investment.

Step-by-step explanation:

The Profitability Index (PI) of a project is calculated by dividing the present value of future cash flows by the initial investment. In this case, Mick's Pub is considering an expansion with an initial investment of $2,300,000 and a Net Present Value (NPV) of $900,000. To find the Profitability Index, we add the NPV of the project to the initial investment, then divide it by the initial investment.

The formula looks like this: PI = (NPV + Initial Investment) / Initial Investment.Using Mick's Pub's figures:PI = ($900,000 + $2,300,000) / $2,300,000 PI = $3,200,000 / $2,300,000 PI = 1.39Therefore, the correct answer is c. 1.39.The profitability index is a ratio used to measure the profitability of an investment project. It is calculated by dividing the net present value (NPV) of the project by the initial investment. In this case, the NPV is $900,000 and the investment is $2,300,000.Profitability Index = NPV / Initial InvestmentTherefore, the profitability index of the project would be:Profitability Index = 900,000 / 2,300,000 = 0.39