PRC-2 · Chapter 5 · Question 35 of 50
What is a 'Profitability Index' (PI) utilized for in project selection?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) To measure the ratio of the present value of future cash flows to the initial investment (Benefit/Cost ratio).
Explanation
The PI (PV of inflows / Initial Outlay) helps rank projects, especially when a company has a limited budget (capital rationing) and needs to see which project gives the most 'bang for its buck'.
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