Asked by Bianca Benincasa on Jul 04, 2024
Verified
An investment is acceptable if the profitability index (PI) of the investment is:
A) Greater than one.
B) Less than one.
C) Greater than the internal rate of return (IRR) .
D) Less than the net present value (NPV) .
E) Greater than a pre-specified rate of return.
Profitability Index (PI)
The profitability index is a ratio that calculates the present value of future cash flows from an investment divided by the investment's initial cost, used to assess the desirability of a project.
Internal Rate Of Return (IRR)
A financial metric used to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value (NPV) of all cash flows equal to zero.
- Understand the application of the Profitability Index (PI) for prioritizing investment projects when faced with capital limitations.
Verified Answer
ZK
Zybrea KnightJul 06, 2024
Final Answer :
A
Explanation :
The profitability index (PI) is a measure used to evaluate the attractiveness of an investment. It is calculated as the present value of future cash flows divided by the initial investment. If the PI is greater than one, it means that the present value of returns exceeds the initial investment, indicating that the investment is expected to be profitable and therefore acceptable.
Learning Objectives
- Understand the application of the Profitability Index (PI) for prioritizing investment projects when faced with capital limitations.