The Profitability Index (PI) for a Proposed Project Is Calculated

question 31

Multiple Choice

The profitability index (PI) for a proposed project is calculated as:

• A) Net present value (NPV) divided by average investment.
• B) Net present value (NPV) divided by initial investment.
• C) Average investment divided by net present value (NPV).
• D) Initial investment divided by net present value (NPV).
• E) Average after-tax income divided by average investment.

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Definitions:

Expected Inflation

The rate at which it is forecasted that the general level of prices for goods and services will rise over a period of time.

Nominal Rate

The interest rate before adjustments for inflation, indicating the gross rate of return on an investment.

Holding-Period Return

The total return received from holding an asset or portfolio over a specified period, accounting for all income and capital gains.

Dividend

A portion of a company's earnings distributed to its shareholders, usually in the form of cash payments or additional shares.