Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing:
A) will provide the same rankings as an NPV criterion.
B) will maximize NPV, but not IRR.
C) can result in misguided selections.
D) is technically impossible.

Question

Quizplus · Accepted Answer

The profitability index can lead to misguided selections when evaluating mutually exclusive projects because it does not account for the scale of the projects, unlike NPV which considers the absolute value of cash flows.

Use of a Profitability Index to Evaluate Mutually Exclusive Projects