CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A project requires an initial investment of $250,000 and has a present value of future cash inflows of $290,000. The profitability index and the NPV are closest to:
The profitability index is 1.16 and the NPV is $40,000. The index divides the $290,000 present value of inflows by the $250,000 investment, while NPV subtracts the investment from that present value. A PI above 1 matches a positive NPV.
- API of 0.86 and NPV of −$40,000
- BPI of 1.16 and NPV of $40,000Correct
- CPI of 1.16 and NPV of $290,000
Explanation
PI = PV of future cash flows / initial investment = 290,000/250,000 = 1.16. NPV = 290,000 − 250,000 = 40,000. Check: PI − 1 = 0.16 and 0.16 × 250,000 = 40,000. The first option inverts the ratio; the third confuses PV of inflows with NPV.
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