Practice Profitability Index (pi) (25.5.B.3) - Capital Budgeting Techniques

Practice: Profitability Index (PI)

Lesson 25.5.B.3Capital Budgeting Techniques

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9 questions

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6 sample questions

Question 1.
What is the definition of Profitability Index?
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Remember, it reflects the efficiency of an investment.
Question 2.
What indicates a potentially profitable project using PI?
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Think about what 'greater than' signifies in investing.
3Question 3.
What does a PI greater than 1 indicate?
- The project should be rejected
- The project is likely profitable
- The project is unfeasible
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Think about profitability.
4Question 4.
The calculation of the Profitability Index requires which estimation?
- True
- False
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What do we need to factor in for future cash flows?
Question 5.
Calculate the Profitability Index of a project that costs $150,000 and generates cash inflows worth $180,000 with a discount rate of 8%. If you have two investment options, one with a PI of 1.2 and another of 1.5, which would you choose?
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Compare the PI of both options directly.
Question 6.
You have two investment projects, Project A requires $100,000 investment and yields $130,000 in PV cash inflows, while Project B needs $120,000 for $150,000 returns. Calculate the PIs and determine which project is more favorable based on these results.
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Calculate and simply compare the PIs.

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