Question

If the NPV (Net Present Value) of a shop is R195 000 and the profitability index is 1,24375, the initial investment in the shop is

[1] R86 908. [2] R800 000. [3] R195 000. [4] R156 784. [5] none of the above

Answer 1

$PI=(NPV+$ initial investment)$\div$ initial investment

$1.24375=(195 000+Initial \space investment)\div$$initial\space investment$

$1.24375 \times initial \space investment=195000+initial\space investment$

$1.24375\times initial\space investment-initial\space investment=195000$

$initial\space investment (1.24374 -1)=195000/0.24373=800065.6$

so option  [2] R800 000 appears to be the correct answer as it is close to the calculated value.