Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following?
A) Conflicts with the results of the net present value decision rule
B) Assumes the firm has sufficient funds to undertake both projects
C) Agrees with the decision that would also apply if the projects were mutually exclusive
D) Bases the accept/reject decision on the same variables as the average accounting return
E) Fails to provide useful information as the firm must reject at least one of the projects

Question

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? 
A) Conflicts with the results of the net present value decision rule 
B) Assumes the firm has sufficient funds to undertake both projects 
C) Agrees with the decision that would also apply if the projects were mutually exclusive 
D) Bases the accept/reject decision on the same variables as the average accounting return 
E) Fails to provide useful information as the firm must reject at least one of the projects

Quizplus · Accepted Answer

The profitability index assumes that the firm has sufficient funds to undertake both projects, as it calculates the ratio of present value of cash inflows to the initial investment. Therefore, the result of the profitability index decision rule indicates that the firm can invest in both projects without facing any financial constraints.

Roger's Meat Market Is Considering Two Independent Projects