Question

(Ignore income taxes in this problem.) The management of Pattee Corporation is considering three investment projects-M, N, and O. Project M would require an investment of $25,000, Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O.

The profitability index of investment project N is closest to:

A. 0.10

B. 0.90

C. 0.09

D. 1.10

Answer 1

D. 1.10

Step-by-step explanation:

The formula to compute the profitability index is shown below:

Profitability index = present value ÷ investment required

where,

Present value is $73,700

And, the investment required is $67,000

So by placing the values to the above formula

The profitability index is

= $73,700 ÷ $67,000

= 1.10

We simply applied the above formula