Question

When using a profitability index (ratio of net present value to initial investment) to select projects, a value of 1.63 is preferred over a value of 1.21.

True

False

Answer 1

Profitability Index:

It is reatio of Present value of future cash inflows to Initial amount invested.

PI = PV of Cash inflows / PV of Cash Outflows
If PI > 1, Project will be accepted,
PI = 1, Indifference point. Project will be accepted/ Rejected.
PI < 1, Project will be rejected.

In case of mutually exclusive projects, Select the project with higher Profitability index.

The Project with PI 1.63 has selected over Project with 1.21

Hence the statement made is TRUE.