What evaluation technique attempts to compare your project's earnings to the earnings of other firms?
A)internal rate of return
B)accounting rate of return
C)earning multiples
D)profitability index

Question

Quizplus · Accepted Answer

Earning multiples, also known as price/earnings ratios, compare a company's earnings to those of similar firms in the industry. This allows for a more accurate comparison and evaluation of the project's potential earnings. Internal rate of return and profitability index are both useful metrics for evaluating the project's profitability, but they do not take into account the earnings of other firms. Accounting rate of return measures the average annual income generated by an investment, but it does not compare it to earnings of other firms in the industry. The evaluation technique that attempts to compare your project's earnings to the earnings of other firms is earning multiples. This technique involves comparing your project's price-to-earnings (P/E) ratio or enterprise value-to-EBITDA (EV/EBITDA) ratio to the same ratios of other companies in the same industry. This provides an indication of how the market values your project relative to other companies in the same industry. Choice A (internal rate of return) is a technique that measures the profitability of a project based on the time value of money. Choice B (accounting rate of return) is a technique that measures the average annual accounting profit of a project as a percentage of the initial investment. Choice D (profitability index) is a technique that measures the present value of future cash flows relative to the initial investment.

What Evaluation Technique Attempts to Compare Your Project's Earnings to the Earnings