Question

The _____ is interpreted as the _____ for each dollar of initial investment. A NPV; PV...

The _____ is interpreted as the _____ for each dollar of initial investment.
A NPV; PV of return
B Profitability index; PV return
C none of these
D Profitability index; cash flow return
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Homework Answers

Answer #1

The profitability index is computed as shown below:

= Present value of future cash flows / Initial investment

It implies the PV return for each dollar of initial investment

If the Profitability Index is greater than 1, it implies that the present value of future cash flows is greater than the initial investment and hence the project should be accepted.

If the Profitability Index is less than 1, it implies that the present value of future cash flows is less than the initial investment and hence the project should not be accepted.

Hence the correct answer is option of Profitability index; PV return

Feel free to ask in case of any query relating to this question

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