ECONOMICS

Detailed explanation-1: -For a single project, profitability index value of 1 or greater is acceptable. If a project has profitability index (>1), then a company should perform the project. However if a project has profitability index (<1), a company should reject the project.

Detailed explanation-2: -The rule is that a profitability index or ratio greater than 1 indicates that the project should proceed. A profitability index or ratio below 1 indicates that the project should be abandoned.

Detailed explanation-3: -When limited capital is available, and projects are mutually exclusive, the project with the highest profitability index is to be accepted as it indicates the project with the most productive use of limited capital. The profitability index is also called the benefit-cost ratio for this reason.

Detailed explanation-4: -If the NPV of a project is greater than 0, then its PI will exceed 1. If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be less than 0. If the PI of a project equals 0, then the project’s initial cash outflow equals the PV of its cash flows.

Detailed explanation-5: -Net Present Value is the sum of the investment’s expected cash inflows and outflows discounted back to their present value at a risk adjusted rate. If the NPV is greater than $0, the project is accepted. Otherwise the project is rejected.