Choice "C" is correct. The formula for the profitability index is:
Present value of net future cash inflowsPresent value of net initial investment | = | Profitability index |
The profitability index is used to rank qualifying investments.Note: The denominator maybe the "present value of the cash outflows" as opposed to "original cash invested" if the investment is not all made at the time of the initial investment.Choice "b" is incorrect. Subtracting after tax net income from minimum required returns is an economic value added concept.
Choice "a" is incorrect. This is the formula for the payback period, not the profitability index.
Choice "d" is incorrect. Net profit times asset turnover is return on investment, not the profitability index.
