A Profitability Index Can Be Used to Rank Investment Proposals

question 40

Essay

A profitability index can be used to rank investment proposals.
Required:
A. Define the profitability index.
B. Two projects are under consideration. Project I has a net present value of $20,000 whereas project II has a net present value of $200,000. Which project is better? Explain. What weakness in a net-present-value analysis does the profitability index address?

---

Definitions:

Federal Reserve Board

A board of governors overseeing the Federal Reserve System, the central banking system of the United States, responsible for setting national monetary policy.

Eminent Domain

The right of a government to expropriate private property for public use, with compensation to the owner.

Private Property

Land or belongings owned by an individual or group, legally protected by laws of the jurisdiction in which it is located.

Contracting Power

The authority granted to entities, often within the government, to enter into legal agreements or contracts, often for procurement or services.