The Profitability Index

question 104

Multiple Choice

The profitability index

• A) does not take into account the discounted cash flows.
• B) is calculated by dividing total cash flows by the initial investment.
• C) allows comparison of the relative desirability of projects that require differing initial investments.
• D) will never be greater than 1.

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Definitions:

Project Accepted

The status of a project that has been approved for execution after evaluation of its feasibility, returns, and alignment with strategic goals.

Terminal Value

The value of a business or project beyond the forecast period when future cash flows can be estimated.

Non-Normal Cash Flows

Cash flow patterns that do not fit the standard or expected periodic inflow or outflow of funds, often seen in irregular income streams.

MIRR

The Modified Internal Rate of Return (MIRR) is a financial measure that adjusts the internal rate of return (IRR) formula to account for different cash flow reinvestment rates.