Which capital budgeting index divides the present value of future cash inflows by the initial capital investment outlay?
AInternal Rate of Return (IRR)
BAccounting Rate of Return (ARR)
CProfitability Index (PI)
DNet Present Value (NPV)
Explanation
* Profitability Index (PI) = Present Value of Future Cash Flows / Initial Investment.
* A project is acceptable if PI > 1.0.
* Particularly effective for ranking projects under capital rationing constraints.
Exam Relevance
- Topic: Capital Budgeting
- Subtopic: Evaluation Metrics
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