The profitability index will be:
A) Greater than 1.0 whenever the net present value is negative.
B) Negative any time the net present value is negative.
C) Less than 1.0 any time the discount rate is less than the IRR.
D) Equal to 1 any time the IRR is less than the discount rate.
E) Greater than 1.0 when the IRR is greater than the discount rate.

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the initial investment. It will be greater than 1.0 when the internal rate of return (IRR) is greater than the discount rate, indicating that the project's return exceeds the cost of capital, thus making it a profitable investment.

The Profitability Index Will Be