Without using formulas, provide a definition of profitability index (PI).
A) A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while PI less than 1 signify negative NPV projects.
B) A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost.
C) A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost.
D) A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment.
E) A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made.

Question

Quizplus · Accepted Answer

The profitability index (PI) is indeed a ranking method used to evaluate the attractiveness of projects. A PI greater than 1 indicates that the project's net present value (NPV) is positive, suggesting that the project is expected to generate more cash than is initially invested, making it a potentially profitable investment. Conversely, a PI less than 1 indicates a negative NPV, suggesting the project is expected to generate less cash than is invested, making it less attractive.

Without Using Formulas, Provide a Definition of Profitability Index (PI)