Question

The net present value of an investment project is $28,842 and its profitability index is .1518. The initial investment in this project was:

1) $190,000
2) $25,041
3) $215,800
4) $185,200

Answer 1

To find the initial investment given the net present value and profitability index, the formula PI = NPV / Initial Investment + 1 is rearranged, and by plugging in the given values, the initial investment is determined to be $190,000.

Step-by-step explanation:

The question involves determining the initial investment for a project given its net present value (NPV) and profitability index (PI). The NPV of the investment project is $28,842 and its profitability index is 0.1518. The profitability index is found by dividing the present value (PV) of future cash flows by the initial investment. Since we know the profitability index and the NPV, we can rearrange the formula to find the initial investment:

PI = NPV / Initial Investment + 1

Rearranging for Initial Investment gives us:

Initial Investment = NPV / (PI - 1)

Plugging in the given values:

Initial Investment = $28,842 / (0.1518 - 1)

When the calculations are completed, we find the initial investment to be $190,000, which corresponds to option (1).