Early, Inc. has chosen four potential investment projects. Listed below are some relevant data on these projects: Project Investment Net Present Value
1 $125,000 $62,500
2 150,000 45,000
3 75,000 52,500
4 112,500 45,000
Use the profitability index to rank these investments in terms of preference:

Question

Quizplus · Accepted Answer

The profitability index is calculated as the Net Present Value (NPV) divided by the investment. The indices are: Project 1: 0.5, Project 2: 0.3, Project 3: 0.7, Project 4: 0.4. Ranking them gives the order 3, 1, 4, 2.