ACCA FM · Chapter 8 · Question 9 of 10
A project requires an initial investment of $180,000 and the present value of its future net cash inflows is $225,000. Defining the profitability index as the NPV per $1 of capital invested, what is the project's profitability index?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 0.25
Explanation
NPV = 225,000 - 180,000 = 45,000. Profitability index = NPV / capital invested = 45,000 / 180,000 = 0.25. The figure of 1.25 is the ratio of PV of inflows to outlay, which is a different definition from the one stated in the question.
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