Asked by Tiffany LaFrance on Apr 24, 2024
Verified
If a project has an initial cost of $50,000.00 and no other costs throughout the life of the project, what is the PI for the project given the NPV is $3,620.00?
A) 1.150
B) 1.072
C) 0.920
D) Cannot be determined
Initial Cost
The initial expense incurred to acquire an asset or start a project, excluding any subsequent costs.
- Comprehend the fundamentals and computations associated with capital budgeting such as Net Present Value, Internal Rate of Return, Profitability Index, and the payback period.
Verified Answer
AL
andrew lange6 days ago
Final Answer :
B
Explanation :
The PI (Profitability Index) formula is:
PI = PV of Future Cash Flows / Initial Investment
Since there are no other costs throughout the life of the project, the PV of future cash flows is simply the NPV ($3,620.00).
Therefore, PI = $3,620.00 / $50,000.00 = 0.072 or 1.072 (rounded to three decimal places).
Option B is the correct answer.
PI = PV of Future Cash Flows / Initial Investment
Since there are no other costs throughout the life of the project, the PV of future cash flows is simply the NPV ($3,620.00).
Therefore, PI = $3,620.00 / $50,000.00 = 0.072 or 1.072 (rounded to three decimal places).
Option B is the correct answer.
Learning Objectives
- Comprehend the fundamentals and computations associated with capital budgeting such as Net Present Value, Internal Rate of Return, Profitability Index, and the payback period.
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