The profitability index
A) does not take into account the discounted cash flows.
B) is calculated by dividing total cash flows by the initial investment.
C) allows comparison of the relative desirability of projects that require differing initial investments.
D) will never be greater than 1.

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of expected cash inflows by the initial investment, hence taking into account the discounted cash flows. It allows for the comparison of projects with different initial investments, which is a valuable tool in investment decision-making. The profitability index can be greater than 1, indicating that the project will generate positive returns. Therefore, the correct option is C.

The Profitability Index