medium · Principles of Finance capital-budgeting
A 5-year project requires a $1,000 investment and has a PV of future cash flows of $1,250.
What is the Profitability Index (PI) and what does it indicate for capital rationing?
- 1.25; Indifferent because the PI must be at least 2.0 for capital rationing.
- 0.25; Reject because it is below the 1.0 threshold.
- 0.80; Reject because the investment is greater than the PV of flows.
- 1.25; Accept because it creates $0.25 of value per dollar invested.
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