Final answer:
The project profitability index is not necessarily superior to the internal rate of return (IRR), as each has its advantages and drawbacks. Correct answer is option b.false.
Step-by-step explanation:
When making preference decisions about competing investment proposals, the question asks whether the project profitability index is superior to the internal rate of return (IRR). The statement is argued both ways, depending on the context, but it's often seen as false, with each method having its own advantages and disadvantages.
The IRR is a popular method that calculates the rate of return at which the net present value (NPV) of all the cash flows from a project or investment equals zero. It is useful for comparing investments of different sizes and duration but can provide misleading signals when used to compare projects of significantly different scales or projects with non-normal cash flows (e.g., those with alternating periods of positive and negative cash flows).
On the other hand, the project profitability index, also known as the benefit-cost ratio, measures the relative profitability of a project. It is calculated by dividing the present value of future expected cash flows by the initial investment. This can be more informative when comparing projects because it provides a ratio that indicates the bang-for-the-buck value of the project and enables the comparison of investments of different sizes.
Variables such as declining energy prices or government incentives can influence the profitability of investments and should be factored into the calculation of both IRR and the profitability index. Nonetheless, neither the IRR nor the profitability index should be used in isolation. Professional financial analysis involves using a combination of different metrics to fully understand the potential benefits and risks associated with an investment.