In preference decisions, the profitability index and internal rate of return methods may produce conflicting rankings of projects

Question

Quizplus · Accepted Answer

The statement is true. The profitability index method and internal rate of return method may produce conflicting rankings of investment projects since they have different approaches in evaluating the profitability of each investment opportunity. The profitability index method compares the present value of expected cash inflows to the present value of the initial investment, while the internal rate of return method calculates the discount rate that makes the net present value of the project equal to zero. As a result, projects with high profitability indexes may have lower internal rates of return, and vice versa.

In Preference Decisions, the Profitability Index and Internal Rate of Return