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A project requiring a $1.5 million investment has a profitability index
of 0.98. What is its net present value?
The profitability index P of a project for which the present value of
all future revenue is R, and which has initial investment I, is
P = R / I .
After multiplying both sides of the equation by I, we see that
P * I = R
or, equivalently,
R = P * I .
So in this case, we have
R = 0.98 * $1,500,000
= $1,470,000 .
The net present value of the project is the present value of future
revenues minus the initial investment.
$1,470,000 - $1,500,000
= -$30,000 .
Thus, the NPV of the project is -$30,000. (The negative value denotes
a money-losing project.) |
