US CMA Part 2 · Chapter 8 · Question 7 of 15
For the Sefton Labs project (initial investment $600,000, present value of future cash inflows $644,436), what is the profitability index?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 1.07
Explanation
Profitability index = PV of future cash inflows / initial investment = $644,436 / $600,000 = 1.07. A PI above 1.0 corresponds to a positive NPV. 0.07 is NPV divided by investment (the net PI), which differs from the PI by exactly 1.
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