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A project has a NPV of 15,000 when the cutoff rate is 10%. The annual cash flows are 20,505 on an investment of 50,000. What is the profitability index?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A project has a NPV of 15,000 when the cutoff rate is 10%. The annual cash flows are 20,505 on an investment of 50,000. What is the profitability index?

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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