The profitability index is most closely related to which one of the following?
A) Payback
B) Discounted payback
C) Average accounting return
D) Net present value
E) Modified internal rate of return

Question

The profitability index is most closely related to which one of the following? 
A) Payback 
B) Discounted payback 
C) Average accounting return 
D) Net present value 
E) Modified internal rate of return

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. This ratio represents the value created per dollar of investment. Net present value (NPV) is calculated in a similar way, as the difference between the present value of cash inflows and the present value of cash outflows. Thus, the profitability index is most closely related to NPV, as both measures consider the time value of money and focus on the economic value of a project or investment. Payback, discounted payback, average accounting return, and modified internal rate of return do not explicitly account for the time value of money and are less comprehensive measures of project profitability.

The Profitability Index Is Most Closely Related to Which One