According to the profitability index criterion, a project is acceptable if its profitability index is
A)greater than 1 plus the cost of capital
B)greater than 0
C)greater than or equal to 1
D)greater than 1.1

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated by dividing the present value of cash inflows by the initial investment. Therefore, if the PI is greater than or equal to 1, it means that the present value of cash inflows is greater than or equal to the initial investment, indicating that the project is profitable and acceptable. Option A is incorrect because it adds unnecessary criteria to the decision-making process. Option B is incorrect because a PI of 0 would mean that the project is not generating any value, which is not acceptable. Option D is incorrect because it sets a specific cutoff point that may not be appropriate for all projects or companies.

According to the Profitability Index Criterion, a Project Is Acceptable