Use of a Profitability Index to Evaluate Mutually Exclusive Projects

question 37

Multiple Choice

Use of a profitability index to evaluate mutually exclusive projects in the absence of capital rationing:

• A) will provide the same rankings as an NPV criterion.
• B) will maximize NPV, but not IRR.
• C) can result in misguided selections.
• D) is technically impossible.

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Definitions:

Maintenance and Repairs Expense

Costs incurred to keep property, plant, and equipment in operating condition and to fix unexpected breakdowns.

Closing Costs

These are fees and expenses, aside from the price of the property, paid by buyers and sellers when transferring ownership of a property.

Freight-In

The cost of transporting goods into a warehouse or to the buyer, which is typically included in the cost of goods sold.

Component Depreciation

A method of depreciation where different components of a fixed asset, with different useful lives, are depreciated separately.