We compute the profitability index of a capital budgeting proposal by
A) multiplying the internal rate of return by the cost of capital.
B) dividing the present value of the annual after-tax cash flows by the cost of capital.
C) dividing the present value of the annual after-tax cash flows by the cash investment in the project.
D) multiplying the cash inflow by the internal rate of return.

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of the annual after-tax cash flows by the cash investment in the project. This index helps in determining the desirability of a project by showing the relationship between the present value of cash inflows and the initial investment.

We Compute the Profitability Index of a Capital Budgeting Proposal