Analysis using the profitability index:
A)frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B)is useful as a decision tool when investment funds are limited.
C)cannot be used to aid capital structure decisions.
D)utilizes the same basic variables as those used in the average accounting return.
E)produces results which typically are difficult to comprehend or apply.

Question

Quizplus · Accepted Answer

The profitability index is useful as a decision tool when investment funds are limited. It helps in determining the relative profitability of different projects by comparing the ratio of present value of cash inflows to the initial investment. This is particularly useful when there are constraints on the availability of investment funds.

Analysis Using the Profitability Index