25.5.B.3. Profitability Index (PI)

Try these first

1. 1.

   What is the definition of Profitability Index?

   Hint

   Remember, it reflects the efficiency of an investment.

2. 2.

   What indicates a potentially profitable project using PI?

   Hint

   Think about what 'greater than' signifies in investing.

3. 3.

   What does a PI greater than 1 indicate?

   • The project should be rejected
   • The project is likely profitable
   • The project is unfeasible

   Hint

   Think about profitability.

4. 4.

   The calculation of the Profitability Index requires which estimation?

   • True
   • False

   Hint

   What do we need to factor in for future cash flows?

5. 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?

   Hint

   Compare the PI of both options directly.

6. 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.

   Hint

   Calculate and simply compare the PIs.