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Math  /  Algebra

QuestionIf the present value of an investment =20,000=20,000. And the Net Present Value =15,000=15,000. Then the Profitability Index = Select one: a. None of the above b. 4 c. 1.3 d. 3

Studdy Solution

STEP 1

1. The present value of the investment is given as 20,00020,000.
2. The net present value (NPV) of the investment is given as 15,00015,000.
3. The Profitability Index (PI) is defined as the ratio of the Present Value of Inflows to the Initial Investment.

STEP 2

1. Understand the formula for the Profitability Index.
2. Identify the Present Value of Inflows.
3. Calculate the Profitability Index using the identified values.

STEP 3

The formula for the Profitability Index (PI) is: PI=Present Value of InflowsInitial Investment PI = \frac{\text{Present Value of Inflows}}{\text{Initial Investment}}

STEP 4

The Present Value (PV) of the investment, which is the Present Value of Inflows, is given as 20,00020,000. Present Value of Inflows=20,000 \text{Present Value of Inflows} = 20,000

STEP 5

The Initial Investment is calculated by subtracting the Net Present Value (NPV) from the Present Value of Inflows. Initial Investment=Present Value of Inflows−Net Present Value \text{Initial Investment} = \text{Present Value of Inflows} - \text{Net Present Value} Initial Investment=20,000−15,000=5,000 \text{Initial Investment} = 20,000 - 15,000 = 5,000

STEP 6

Substitute the values into the formula for the Profitability Index (PI). PI=20,0005,000=4 PI = \frac{20,000}{5,000} = 4

STEP 7

The Profitability Index is 44. Therefore, the correct answer is: Profitability Index=4 \text{Profitability Index} = 4

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