alleryStart learning →When net present value is greater than zero, the profitability index will be:
AGreater than one
BGreater than ten
CSmaller than zero
DSmaller than half
Answer & Solution
Correct answer: A. Greater than one
1. The profitability index is benefits divided by costs.
2. A positive net present value means the benefits exceed the costs.
3. When NPV is greater than zero, PI will be greater than 1.
4. So the index sits above one.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 16 'How Companies Think about Investing', sections 16.1-16.5_
Keep practising Capital Budgeting
Browse all Capital Budgeting questions for US CMA Part 2, or explore more Finance topics.
Related questions
Find the crossover rateWhich figure is higherSpot the false ruleLeave the strength standingAccept it or reject itThe discounted payback period improves on plain payback by first doing what to the cash flA machine costs $16,000 and the added cash inflow recovers that cost over four years. PaybThe NPV method and the profitability index method will always agree on: