COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Requires estimate of cost of capital
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May not give value-maximizing decisions for mutually exclusive projects
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Provides only relative profitability
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Tells whether firm value is increased
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Detailed explanation-1: -The Profitability Index (PI) measures the ratio between the present value of future cash flows and the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment.
Detailed explanation-2: -no, because the rule does not indicate whether or not we are creating value for the firm, it should not be the primary decision rule. 2. Estimate the required return for projects of this risk level. 3.
Detailed explanation-3: -Profitability Index method is also known as the Benefit-Cost Ratio.
Detailed explanation-4: -All you need to do is to find out the present value of future cash flows and then divide it by the initial investment of the project. However, there is another way through which we can express PI, and that is through net present value. NPV. If the difference is positive, the project is profitable; otherwise, it is not.