COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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multiplying the internal rate of return by the cost of capital.
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dividing the present value of the annual after-tax cash flows by the cost of capital.
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dividing the present value of the annual after-tax cash flows by the cash investment in the project.
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multiplying the cash inflow by the internal rate of return.
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Detailed explanation-1: -The Protability Index is computed by dividing the present value of cash inows of the capital investment by the present value of cash outows of the capital investment. If the Protability Index is greater than one, the capital investment is accepted.
Detailed explanation-2: -The profitability index is calculated by dividing the present value of future cash flows that will be generated by the project by the initial cost of the project. A profitability index of 1 indicates that the project will break even.
Detailed explanation-3: -The profitability index (PI) is a measure of a project’s or investment’s attractiveness. The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.
Detailed explanation-4: -Answer: If a project’s profitability index is equal to 1 then Net present value is positive. Explanation: Profitability index is 1 at a point where the future inflows plus initial investment is equal.