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Asked by Donna-Lee Graham on May 07, 2024

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A present value index can be used to rank competing capital investment proposals when the net present value method is used.

Present Value Index

An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time, used in capital budgeting to assess the profitability of investments.

Capital Investment

Funds invested in a firm or enterprise for the purpose of furthering its business objectives, including purchase of physical goods or investment in projects.

  • Become familiar with the net present value analysis process and its effects on capital investment strategies.
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Jerod WilliamsMay 09, 2024
Final Answer :
True
Explanation :
A present value index (also known as profitability index) is a ratio of the present value of cash inflows to the initial investment. It is a useful tool to evaluate and rank capital investment proposals, especially when the net present value method is used. A present value index greater than 1 indicates that the investment proposal is expected to generate positive net present value, while a ratio less than 1 implies a negative net present value. Therefore, projects with higher present value indexes are preferred over those with lower ratios.

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