An investment opportunity costing $500,000 has a profitability index of 1.05. Which of the followingstatements is incorrect?

Question

Quizplus · Accepted Answer

The profitability index is calculated as the present value of future cash flows divided by the investment cost. A profitability index of 1.05 indicates that for every dollar invested, the project returns $1.05, which directly relates to the present value of future cash flows and the net present value but does not directly indicate anything about the accounting rate of return or its comparison to 5%.

An Investment Opportunity Costing $500,000 Has a Profitability Index of 1.05