A Firm Plans to Use the Profitability Index to Select

question 3

Multiple Choice

A firm plans to use the profitability index to select between two mutually exclusive investments.If no capital rationing has been imposed,which project should be selected?

• A) Select the project with the higher profitability index
• B) Select the project with the lower profitability index
• C) Without capital rationing, both projects can be selected
• D) Without capital rationing, the NPV method must be used instead

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Definitions:

Inventories

Tangible property held for sale in the ordinary course of business, under production for such sale, or to be used in producing goods.

Process Costing System

A method of allocating production costs to products and services based on the processes they go through, common in industries where products are indistinguishable.

Costs Flow

The movement and allocation of costs through different stages of production or services within a company.

Finished Goods

Products that have completed the manufacturing process but have not yet been sold to customers.