Project A has a profitability index of 0.85. Project B has a profitability index of 1.24. The two projects are independent. Which of the following statements is (are)true?
A)Only Project B should be accepted since it is the only one of the two projects that will maximize value.
B)Both projects should be accepted since they are independent and each one has a profitability index greater than zero.
C)Both Project A and Project B will have net present values that are greater than zero.
D)Both A and C are true statements.

Question

Quizplus · Accepted Answer

The profitability index (PI) is a measure used to evaluate the attractiveness of an investment or project. A PI greater than 1 indicates that the net present value (NPV) of future cash flows from the investment is positive, suggesting that the project is likely to add value to the firm and should be accepted. Project B, with a PI of 1.24, meets this criterion, indicating it will likely add value. Project A, with a PI of 0.85, does not meet this criterion as its PI is less than 1, suggesting it will not add value and should not be accepted based on this measure alone. Therefore, only Project B should be accepted to maximize value.

Project a Has a Profitability Index of 0