St Andrews School Ranks Investments by Using the Profitability Index

question 22

Multiple Choice

St. Andrews School ranks investments by using the profitability index (PI) . The following data relate to Project X and Project Y: $$\begin{array} { l r r } & \text { Project X } & \text { Project Y } \\\text { Initial investment } & \$ 400,000 & \$ 1,300,000 \\\text { Present value of inflows } & 600,000 & 1,800,000\end{array}$$ Which project would be more attractive as judged by its ranking, and why?

• A) Project X because the PI is 1.50.
• B) Project Y because the PI is 1.38.
• C) Project X because the PI is 0.67.
• D) Project Y because the PI is 0.72.
• E) Both projects would be equally attractive in terms of ranking, as indicated by a positive PI.

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