Homework Answers
Profitability index is calculated using the below formula:
Profitability Index= NPV + Initial investment/ Initial investment
Net present value can be calculated using a financial calculator by inputting the below:
- • Press the CF button.
- • CF0= -$1,000,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.
- • Cash flow for each year should be entered.
- • Press Enter and down arrow after inputting each cash flow.
- • After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 4%.
- • Press enter after that. Press the down arrow and CPT buttons to get the net present value.
The net present value is $277,345.53.
Profitability Index= 277,345.53 + $1,000,000/ $1,000,000
= $1.277,345.53/ $1,000,000
= 1.2773.
Hence, the answer is option D.
In case of any query, kindly comment on the solution.
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