Respuesta :
Answer:
d. 1.38
Explanation:
The computation of potential investment's profitability index is shown below:-
As we know that
Profitability index (PI) = PV of future cash flows ÷ Initial investment
Now
NPV = Present value of future cash flows - initial investment
$36,224 = Present value of future cash flows - $95,000
Present value of future cash flows = $36,224 + $95,000
= $131,224
So,
Profitability index = Present value of future cash flows ÷ Initial investment
= $131,224 ÷ $95,000
= 1.38
Therefore we have applied the above formula.
The potential investment's profitability index is 1.38.
The profitability index is used to determined the profitability of a project. It is a capital budgeting method
Profitability index = 1 + (NPV / Initial investment)
The net present value is the cost of an asset less the sum of the discounted cash flows of the project.
Profitability index = 1 + (36,224 / 95,000) = 1.38
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