The profitability index:
A)rule often results in decisions that conflict with the decisions based on the net present value rule.
B)is useful as a decision tool when investment funds are limited and all available funds are allocated.
C)method is most commonly used when deciding between mutually exclusive projects of varying size.
D)rule states that the project with the lower index value should be accepted.
E)produces results which typically are difficult to comprehend.

Question

Quizplus · Accepted Answer

The profitability index (PI) is useful in situations where investment funds are limited and all available funds must be allocated to determine which projects will yield the highest positive return on investment per dollar spent. The PI rule is to accept the project with the highest PI value. This means that projects that are more efficient in generating profits are preferred to projects that require more capital to generate the same amount of profit.

The Profitability Index