We compute the profitability index of a capital-budgeting proposal by
A) multiplying the IRR 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 cost of the project.
D) multiplying the cash inflow by the IRR.

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of the annual after-tax cash flows by the cost of the project. This index helps in determining the value created per unit of investment.

We Compute the Profitability Index of a Capital-Budgeting Proposal by