When managers must choose among independent projects,they should prioritize projects according to their net present value.The net present value is ill-suited to compare projects of different size.Independent projects should be prioritized according to their profitability index.

Question

Quizplus · Accepted Answer

The net present value (NPV) is actually well-suited to compare projects of different size, as it takes into account the time value of money and the relevant cash flows. However, when choosing among independent projects with limited resources, it may be helpful to also consider the profitability index (PI), which measures the return on investment per unit of investment. Therefore, independent projects should be prioritized based on a combination of NPV and PI.

When Managers Must Choose Among Independent Projects,they Should Prioritize Projects