Question 8 How can a profitability index by used to compare

Question 8 How can a profitability index by used to compare potential projects in a capital rationing scenario? Question 8 options: Profitability Indexes are publicly available and trade on the Profitability Exchange. Illustrates the amount of value creation (NPV) compared to initial investment. Both A and B above. Neither A or B above.

Solution

CORRECT ANSWER : NEITHER A OR B ABOVE

PROFITABILITY INDEX = PV OF ALL CASH FLOWS / INITIAL INVESTMENT

It gives the amount of value created per unit of investment.

so it can not be termed as NPV. NPV itself is a different method.

Profitability indexes are not publicly available as we have to calculate separately for each project.

so correct answer : Neither A or B above