St. Andrews School ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y: $$\begin{array} { l r r }
& \text { Project X } & \text { Project Y } \
\text { Initial investment } & \$ 400,000 & \$ 1,300,000 \
\text { Present value of inflows } & 600,000 & 1,800,000
\end{array}$$ Which project would be more attractive as judged by its ranking, and why?

Question

St. Andrews School ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y: $$\begin{array} { l r r } 
& \text { Project X } & \text { Project Y } \
\text { Initial investment } & \$ 400,000 & \$ 1,300,000 \
\text { Present value of inflows } & 600,000 & 1,800,000
\end{array}$$ Which project would be more attractive as judged by its ranking, and why?

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of inflows divided by the initial investment. For Project X, PI = 600,000 / 400,000 = 1.50. For Project Y, PI = 1,800,000 / 1,300,000 = 1.38. A higher PI indicates a more attractive investment, so Project X is more attractive.

St Andrews School Ranks Investments by Using the Profitability Index