Answer (C) is correct . The profitability index is the ratio of the present value of future net cash inflows to the initial cash investment. This variation of the net present value method facilitates comparison of different-sized investments. Were it not for this comparison feature, the profitability index would be no better than the net present value method. Thus, it is the comparison, or ranking, advantage that makes the profitability index different from the other capital budgeting tools.
Answer (A) is incorrect because The net present value (NPV > 0) is a capital budgeting tool that screens investments; i.e., the investment must meet a certain standard to be acceptable.
Answer (B) is incorrect because The time-adjusted rate of return is a capital budgeting tool that screens investments; i.e., the investment must meet a certain standard (rate of return) to be acceptable.
Answer (D) is incorrect because The accounting rate of return is a capital budgeting tool that screens investments; i.e., the investment must meet a certain standard (rate of return) to be acceptable.
|
