Which of the following is TRUE regarding the profitability index?
A)It does not use the net present value (NPV)to assess benefits.
B)It is very simple to compute.
C)Attention must be taken when using it to make sure that all of the constrained resource is utilized.
D)It is unreliable when used for choosing between different projects.
E)It ignores cash flows after the cutoff

Question

Quizplus · Accepted Answer

The profitability index takes into account the constraints of limited resources, so attention must be taken to ensure that all of the constrained resource is utilized. Option A is incorrect as the profitability index is based on NPV. Option B is incorrect because the calculation of the profitability index can be complex. Option D is incorrect because the profitability index can be used for choosing between different projects. Option E is incorrect because the profitability index includes all cash flows up to the end of the project's life.

Which of the Following Is TRUE Regarding the Profitability Index