Question

Which one is an incorrect statement? Group of answer choices Profitability index ranking is better than...

Which one is an incorrect statement?

Group of answer choices

Profitability index ranking is better than NPV ranking in capital rationing

Profitability index is a ratio of PV of Future Cash Flows and Investment

Ranking of projects by profitability index is similar to that of NPV

Profitability index value is always more than 1 for positive NPV projects

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Homework Answers

Answer #1

The answer is RANKING OF PROJECTS BY PROFITABILITY INDEX IS SIMILAR TO THAT OF NPV.

Reason:-

Profitability index is a ratio of PV of future cash flows and the investment. It is one of the best tool for capital budgeting valuations when there are scarcity of resources and mutually exclusive projects are available i.e. for capital rationing.

PI Ratio is completely different from NPV because PI Ratio is of PV of inflows and outflows while NPV is the difference of PV of inflows and outflows.

When PI Ratio is more than 1 then it indicates a positive NPV project i.e it indicates the what the return is against a rupee of outflow.

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