If the NPV of a project is greater than 0, then its profitability index is:
A)Greater than 1
B)Greater than 0
C)Less than 1
D)None of these

Question

Quizplus · Accepted Answer

The profitability index (PI) is the ratio of the present value of future cash flows to the initial investment. 
PI = PV of future cash flows / Initial investment 
If the NPV is greater than 0, it means that the present value of future cash inflows is greater than the initial investment. Therefore, the PI will be greater than 1, as the numerator is greater than the denominator. A PI greater than 1 indicates that the project is expected to generate positive returns, as the present value of expected cash inflows exceeds the initial investment.

If the NPV of a Project Is Greater Than 0