The Present Value Index Is Computed Using Which of the Following

question 83

Multiple Choice

The present value index is computed using which of the following formulas?

• A) Amount to be invested/Average rate of return
• B) Total present value of net cash flow/Amount to be invested
• C) Total present value of net cash flow/Average rate of return
• D) Amount to be invested/Total present value of net cash flow

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Definitions:

Internal Rate of Return

A metric used in capital budgeting to estimate the profitability of potential investments.

Firm's Cost

The total expenses incurred by a business in the process of producing and selling its goods or services, including both fixed and variable costs.

Reinvestment Assumption

An assumption in finance that future cash flows from an investment will be reinvested at a constant rate.

Payback Period

The length of time it takes for an investment to generate cash flows sufficient to recover its initial cost, often used to evaluate the profitability of an investment.