Based upon the following data: calculate the Profitability Index. Cost = $325Present value of future cash flows = $350
Question
Based upon the following data: calculate the Profitability Index.
Cost: 350
Solution
The Profitability Index (PI) is calculated by dividing the present value of future cash flows by the initial investment cost.
Here's the step-by-step calculation:
- Identify the present value of future cash flows. In this case, it's $350.
- Identify the initial investment cost. In this case, it's $325.
- Divide the present value of future cash flows by the initial investment cost to get the Profitability Index.
So, PI = Present value of future cash flows / Cost PI = 325 PI = 1.0769
So, the Profitability Index is 1.0769. This means that for every dollar invested, we expect to get back about $1.08.
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