Early, Inc. has chosen four potential investment projects. Listed below are some relevant data on these projects: $\begin{array}{lrr}\text { Project }&\text { Investment }&\text { Net Present Value }\\hline
1 & \$ 125,000 & \$ 62,500 \
2 & 150,000 & 45,000 \
3 & 75,000 & 52,500 \
4 & 112,500 & 45,000
\end{array}$ Use the profitability index to rank these investments in terms of preference:
A) 1, 3, 2, 4
B) 2, 1, 4, 3
C) 1, 2, 3, 4
D) 3, 1, 4, 2

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the net present value (NPV) of a project by the initial investment. The projects with the highest PI should be preferred. Calculating the PI for each project: Project 1: $62,500 / 125,000 = 0.5$, Project 2: $45,000 / 150,000 = 0.3$, Project 3: $52,500 / 75,000 = 0.7$, Project 4: $45,000 / 112,500 = 0.4$. Thus, the preference order based on PI is 3, 1, 4, 2.

Early, Inc Use the Profitability Index to Rank These Investments in Terms