The proﬁtability index is closely related to:
A) Payback.
B) Discounted payback.
C) The average accounting return.
D) Net present value.
E) Mutually exclusive projects.

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of cash inflows by the initial investment. It is therefore closely related to net present value, which also takes into account the time value of money and compares the present value of cash inflows to the initial investment. Choice A (payback) and B (discounted payback) only consider the amount of time it takes to recover the initial investment and do not take into account the time value of money. Choice C (average accounting return) is a measure of a project's average annual profit as a percentage of the initial investment, but does not take into account the time value of money. Choice E (mutually exclusive projects) refers to a situation where only one of two or more projects can be chosen, and is not directly related to the concept of the profitability index.

The Proﬁtability Index Is Closely Related To