The profitability index (PI) approach ____.
A) fails to directly consider the timing of a project's cash flows
B) considers only a project's contributions to net income and does not consider cash flow effects
C) always gives the same accept-reject decisions for independent projects as does NPV and IRR
D) always gives the same accept-reject decisions for mutually exclusive projects as does NPV and IRR

Question

Quizplus · Accepted Answer

The profitability index (PI) approach, like NPV (Net Present Value) and IRR (Internal Rate of Return), takes into account the timing and magnitude of cash flows, making it consistent with these methods for independent projects in terms of accept-reject decisions. However, for mutually exclusive projects, the decisions may differ due to scale differences and the reinvestment rate assumption for IRR.

The Profitability Index (PI) Approach ____