A project requires an initial investment of $1,000,000 and has a PV of inflows of $1,100,000 at the required rate. What is the profitability index (PI)?

A project requires an initial investment of $1,000,000 and has a PV of inflows of $1,100,000 at the required rate. What is the profitability index (PI)?

• A. 1.00
• B. 1.10
• C. 1.20
• D. 1.50

Answer: (B)

Profitability index shows how much value is created per dollar invested by comparing the present value of inflows to the initial outlay. Here the present value of inflows is 1,100,000 and the initial investment is 1,000,000, so the PI = 1,100,000 / 1,000,000 = 1.10. A PI above 1 means the project adds value at the required rate, so this is acceptable. The numbers don’t fit the other options: a PI of 1.00 would mean inflows equal the investment, 1.20 would require 1,200,000 of PV inflows, and 1.50 would require 1,500,000. Therefore, the profitability index is 1.10.

Profitability index shows how much value is created per dollar invested by comparing the present value of inflows to the initial outlay. Here the present value of inflows is 1,100,000 and the initial investment is 1,000,000, so the PI = 1,100,000 / 1,000,000 = 1.10. A PI above 1 means the project adds value at the required rate, so this is acceptable. The numbers don’t fit the other options: a PI of 1.00 would mean inflows equal the investment, 1.20 would require 1,200,000 of PV inflows, and 1.50 would require 1,500,000. Therefore, the profitability index is 1.10.