Which of the following is true regarding the profitability index?
A)It does not use the net present value (NPV)to assess benefits.
B)It is unreliable when used for choosing between different projects.
C)It is very simple to compute.
D)Attention must be taken when using it to make sure that all of the constrained resource is used.

Question

Quizplus · Accepted Answer

The profitability index is calculated by dividing the present value of future cash inflows by the initial investment. This helps to determine the value created per unit of investment. However, attention must be taken that all of the constrained resource is used to maximize profitability. Therefore, option D is the true statement regarding profitability index. Options A, B, and C are false statements.

Which of the Following Is True Regarding the Profitability Index