Question

the decision rule for the profitability index is that any project with______is an acceptable project.
a. a ratio less than one
b. a ratio greater than one
c. a ratio greater than zero
d. a ratio less than zero

Answer 1

Solution.>

The decision rule for the profitability index is that any project with a ratio greater than one is an acceptable project.

The reason being, PI is basically a variation of NPV rule.

Profitability index = 1 + (NPV/Initial Cost), hence if the returns are greater than cost, the PI will always be greater than 1 and will be accepted as per capital budgeting techniques.

Hence, the correct option is (B).

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