The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

Question

Quizplus · Accepted Answer

The statement is true. The profitability index is calculated by dividing the present value of cash inflows by the initial investment. The higher the profitability index, the more profitable the project is considered to be, which makes it more desirable. Therefore, the preference rule for ranking projects by the profitability index is to choose projects with a higher profitability index.

The Preference Rule for Ranking Projects by the Profitability Index