The profitability index (PI) for a proposed project is calculated as:
A) Net present value (NPV) divided by average investment.
B) Net present value (NPV) divided by initial investment.
C) Average investment divided by net present value (NPV).
D) Initial investment divided by net present value (NPV).
E) Average after-tax income divided by average investment.

Question

Quizplus · Accepted Answer

The profitability index (PI) is the ratio of the present value of expected future cash flows to the initial investment. Therefore, the correct formula for calculating PI is net present value (NPV) divided by initial investment (I). Choice B is the only one that presents the correct formula.

The Profitability Index (PI) for a Proposed Project Is Calculated