Using the Profitability Index, Which of the Following Projects Should

question 92

Multiple Choice

Using the profitability index, which of the following projects should be accepted?
$$\begin{array} { l l l } \text { Praject } M : & \text { NPV } = \$ 60,000 & \text { NINV } = \$ 200,000 \\\text { Praject } N : & N P V = \$ 10,000 & \text { NINV } = \$ 30,000 \\\text { Praject } 0 : & N P V = \$ 2,000 & \text { NINV } = \$ 5,000\end{array}$$

• A) Project M NPV = $2,000 NINV = $5,000
• B) Project N
• C) Project O
• D) All projects should be accepted

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Definitions:

Straight-Line Depreciation

A method of calculating the depreciation of an asset, which allocates an equal amount of depreciation each year over the asset's useful life.

Payback Period

The time it takes for an investment to generate an amount of income or cash equal to the cost of the investment.

Salvage Value

Projected value of an asset for resale once it has concluded its period of effective use.

Installation Costs

Installation costs are expenses associated with setting up or installing equipment, machinery, or other assets so they are ready for use.