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Answer (C) is correct . The profitability index is the ratio of the present value of future net cash inflows to the initial net cash investment. It is a variation of the net present value (NPV) method and facilitates the comparison of different-sized investments. Because it is based on the NPV method, the profitability index will yield the same decision as the NPV for independent projects. However, decisions may differ for mutually exclusive projects of different sizes.

Answer (A) is incorrect because The profitability index, like the NPV method, discounts cash flows based on the cost of capital.
Answer (B) is incorrect because The profitability index is cash based.
Answer (D) is incorrect because The NPV and the profitability index may yield different decisions if projects are mutually exclusive and of different sizes.