The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
A)average accounting return.
B)internal rate of return.
C)net present value.
D)profile period.
E)profitability index.

Question

Quizplus · Accepted Answer

The present value of an investment's future cash flows divided by the initial cost of the investment is referred to as the profitability index. Therefore, the correct answer is E. The average accounting return is calculated as the average net income divided by the average book value of the investment, which is not the same as the present value of future cash flows divided by the initial cost. The internal rate of return is the interest rate at which the net present value of an investment is zero, whereas net present value is the difference between the present value of cash inflows and the present value of cash outflows. Profile period is not a commonly used financial metric.

The Present Value of an Investment's Future Cash Flows Divided