Profitability index is the ratio of:
A) Future value of cash flows to investment
B) Net present value of cash flows to investment
C) Net present value of cash flows to IRR
D) Present value of cash flows to IRR

Question

Quizplus · Accepted Answer

Profitability index is calculated by dividing the net present value (NPV) of cash flows by the initial investment. Therefore, option B - Net present value of cash flows to investment - is the correct answer. Option A is incorrect because it refers to the future value of cash flows, which doesn't take into account the time value of money. Option C and D are incorrect because they both involve IRR, which is a different calculation from profitability index.

Profitability Index Is the Ratio Of