Using the profitability index, which of the following projects should be accepted? $$\begin{array} { l l l }
\text { Project M: } & \text { NPV } = \$ 60,000 & \text { NINV } = \$ 200,000 \
\text { Project N: } & \text { NPV } = \$ 10,000 & \text { NINV } = \$ 30,000 \
\text { Project O: } & \text { NPV } = \$ 2,000 & \text { NINV } = \$ 5,000
\end{array}$$
A) Project M
B) Project N
C) Project O
D) All projects should be accepted

Question

Using the profitability index, which of the following projects should be accepted? $$\begin{array} { l l l } 
\text { Project M: } & \text { NPV } = \$ 60,000 & \text { NINV } = \$ 200,000 \
\text { Project N: } & \text { NPV } = \$ 10,000 & \text { NINV } = \$ 30,000 \
\text { Project O: } & \text { NPV } = \$ 2,000 & \text { NINV } = \$ 5,000
\end{array}$$
A) Project M
B) Project N
C) Project O
D) All projects should be accepted

Quizplus · Accepted Answer

The profitability index (PI) is calculated as $PI = \frac{NPV + NINV}{NINV}$. For each project: Project M: $PI = \frac{60,000 + 200,000}{200,000} = 1.3$, Project N: $PI = \frac{10,000 + 30,000}{30,000} = 1.33$, Project O: $PI = \frac{2,000 + 5,000}{5,000} = 1.4$. Since all projects have a PI greater than 1, they should all be accepted.

Using the Profitability Index, Which of the Following Projects Should