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Question 12.5: You are considering a project that has an initial outlay of ...

You are considering a project that has an initial outlay of $1 million. The profitability index of the project is 2.24. What is the NPV of the project?

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You can use Equation 12.8 to solve for the NPV:

\begin{matrix}PI&=&\frac{\text{Benefits}}{\text{Costs}}=\frac{\text{Present value of future free cash flows}}{\text{Initial investment}}\\ \\PI&=&\frac{\text{NPV+Initial investment}}{\text{Initial investment}} \\ \\ 2.24&=&\frac{NPV+\$1,000,000}{\$1,000,000} \end{matrix}

 

Therefore:

\quad \quad \quad \quad NPV=\$1,240,000

 

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