Which of the following statements about the profitability index evaluation technique is true?
A)When used to compare projects, the profitability index evaluation technique will tend to favor those projects with lower initial investment requirements.
B)If a project has a profitability index greater than zero, it should be accepted.
C)It is most useful when evaluating mutually exclusive projects.
D)All of the above statements are true.

Question

Quizplus · Accepted Answer

The profitability index (PI) is a technique used to evaluate the attractiveness of an investment or project. It is calculated by dividing the present value of future cash flows by the initial investment. A higher PI indicates a more attractive investment because it means that for every unit of currency invested, the project will generate more in present value terms. Therefore, projects with lower initial investments and higher present value of future cash flows will tend to have higher PIs, making statement A correct. Statement B is incorrect because a project should be accepted if its PI is greater than 1, not zero. Statement C is also incorrect because the PI is useful for evaluating all types of projects, not just mutually exclusive ones.

Which of the Following Statements About the Profitability Index Evaluation