Trovato Corporation Is Considering a Project That Would Require an Investment

question 123

Multiple Choice

Trovato Corporation is considering a project that would require an investment of $48,000. No other cash outflows would be involved. The present value of the cash inflows would be $51,840. The profitability index of the project is closest to (Ignore income taxes.) :

• A) 0.07
• B) 0.08
• C) 0.92
• D) 1.08

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Definitions:

Exercise Value

Equal to the current price of the stock (underlying the option) less the strike price of the option.

Call Options

Financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specific time period.

Strike Price

The price stated in the option contract at which the security can be bought (or sold). Also called the exercise price.

Premium

An amount paid in addition to the standard or nominal cost, often for insurance, bonds, or superior products or services.