Asked by Grace Ecton on Jun 24, 2024
Verified
The management of Leitheiser Corporation is considering a project that would require an initial investment of $51,000. No other cash outflows would be required. The present value of the cash inflows would be $57,630. The profitability index of the project is closest to (Ignore income taxes.) :
A) 1.13
B) 0.87
C) 0.13
D) 0.12
Profitability Index
A financial tool used to determine the desirability of an investment or project, calculated as the present value of future cash flows divided by the initial investment.
Present Value
The present value of a future amount of money or series of payments, calculated based on a certain rate of return.
Initial Investment
The amount of money used to start a business or project.
- Analyze and implement the profitability index methodology within investment evaluation processes.
Verified Answer
PI = $57,630 / $51,000
PI = 1.13
Therefore, the best choice is A. The profitability index of the project is 1.13, indicating that for every $1 invested, the project will generate $1.13 in present value of cash inflows. This suggests that the project is profitable and should be considered by the management of Leitheiser Corporation.
Learning Objectives
- Analyze and implement the profitability index methodology within investment evaluation processes.
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