The profitability index and the internal rate of return:
A) will always result in the same preference ranking for investment projects.
B) will sometimes result in different preference rankings for investment projects.
C) are less dependable than the payback method in ranking investment projects.
D) are less dependable than net present value in ranking investment projects.

Question

Quizplus · Accepted Answer

The profitability index and the internal rate of return may sometimes result in different preference rankings for investment projects. The profitability index measures the present value of future cash flows per dollar of initial investment, while the internal rate of return is the discount rate at which the present value of cash inflows equals the initial investment. In some cases, one project may have a higher profitability index but a lower internal rate of return than another project, resulting in different rankings.

The Profitability Index and the Internal Rate of Return