A profitability index can be used to rank investment proposals.
Required:
A.Define the profitability index.
A.The profitability index equals the present value of a project's cash inflows divided by the initial investment.
B.Both projects provide a return greater than the hurdle rate and both are acceptable.It is not possible to say which one is better.The profitability index provides a ratio that is not influenced by the size of the project-a limitation of net-present-value (NPV)analysis.Thus,a project that has a greater NPV and a greater profitability index generally will be more attractive than another project against which it is being compared.
B.Two projects are under consideration.Project I has a net present value of $20,000 whereas project II has a net present value of $200,000.Which project is better? Explain.What weakness in a net-present-value analysis does the profitability index address?

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The Answer of A profitability index can be used to rank investment proposals.
Required:
A.Define the profitability index.
A.The profitability index equals the present value of a project's cash inflows divided by the initial investment.
B.Both projects provide a return greater than the hurdle rate and both are acceptable.It is not possible to say which one is better.The profitability index provides a ratio that is not influenced by the size of the project-a limitation of net-present-value (NPV)analysis.Thus,a project that has a greater NPV and a greater profitability index generally will be more attractive than another project against which it is being compared.
B.Two projects are under consideration.Project I has a net present value of $20,000 whereas project II has a net present value of $200,000.Which project is better? Explain.What weakness in a net-present-value analysis does the profitability index address?

A Profitability Index Can Be Used to Rank Investment Proposals