The proﬁtability index will be:
A) Greater than 1.0 whenever the net present value is negative.
B) Negative any time the net present value is negative.
C) Less than 1.0 any time the discount rate is less than the IRR.
D) Equal to 1 any time the IRR is less than the discount rate.
E) Greater than 1.0 when the IRR is greater than the discount rate.

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of cash inflows divided by the initial investment. Therefore, if the present value of cash inflows is greater than the initial investment, the PI will be greater than 1.0, indicating that the investment is profitable. Thus, when the IRR is greater than the discount rate, the present value of cash inflows will be greater than the initial investment, and the PI will be greater than 1.0. Therefore, the correct answer is E.

The Proﬁtability Index Will Be