Answer (C) is correct . The profitability index is the present value of the future net cash flows divided by the present value of the net initial investment. The present value of the future net cash flows is $837,200. Dividing the $800,000 initial cost of the investment into the $837,200 present value of the future net cash inflows produces a profitability index of approximately 1.05. Any profitability index greater than one is considered acceptable.
Answer (A) is incorrect because This figure results from using the NPV in the numerator.
Answer (B) is incorrect because This figure reverses the numerator and denominator of the calculation.
Answer (D) is incorrect because This figure uses undiscounted earnings in the numerator instead of the present value of future net cash flows.
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What is the profitability index for the investment?