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 very simple to compute.
C) Attention must be taken when using it to make sure that all of the constrained resource is utilized.
D) It is unreliable when used for choosing between different projects.

Question

Quizplus · Accepted Answer

The profitability index is a ratio of the present value of the future cash flows to the initial investment, and it is useful in determining which projects to undertake when there are limited resources. However, attention must be taken to ensure that the constrained resource is fully utilized to maximize profitability. Option A is false because the profitability index does use NPV. Option B is false because the computation of the profitability index is more complex than other investment appraisal techniques. Option D is false because the profitability index is a useful tool for choosing between different projects.

Which of the Following Is True Regarding the Profitability Index