Asked by Haroon Naseer on May 14, 2024
Verified
Using a profitability index allows management to rank projects of similar risks with different investment amounts.
Profitability Index
A financial tool used to determine the relationship between the costs and benefits of a proposed project, calculated by dividing the present value of future cash flows by the initial investment.
Investment Amounts
The total funds allocated by individuals or businesses towards investment vehicles like stocks, bonds, or real estate for the purpose of earning returns.
- Grasp the methods for ranking and prioritizing investment projects.
Verified Answer
AO
Alberto OrnelasMay 15, 2024
Final Answer :
True
Explanation :
This statement is true. The profitability index (PI) is a financial metric that measures the ratio of the present value of future cash flows to the initial investment. By comparing PI values across different projects, management can determine which project is most profitable per dollar invested, regardless of the project size or risk level.
Learning Objectives
- Grasp the methods for ranking and prioritizing investment projects.