Analysis using the profitability index
A)frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B)is useful as a decision tool when investment funds are limited.
C)offers no real value when making capital structure decisions.
D)utilizes the same basic variables as those used in the average accounting return.
E)produces results that typically are difficult to comprehend or apply.

Question

Quizplus · Accepted Answer

The profitability index is useful when investment funds are limited because it measures the bang for the buck, or the amount by which the present value of future cash inflows exceeds the initial cost of the investment per dollar of the investment. By prioritizing investments with a higher profitability index, limited funds can be allocated to those investments that provide the best return on investment.

Analysis Using the Profitability Index