Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
-The preference rule for ranking projects by the profitability index is: the higher the profitability index, the more desirable the project.

Question

Quizplus · Accepted Answer

This is a true statement. The profitability index is a measure of the present value of future cash flows relative to the initial investment. A higher profitability index indicates a more profitable project.

Reference: 10-04 The Finney Company Is Reviewing the Possibility of Remodelling One