Final answer:
The most useful evaluation tool for non-mutually exclusive investment projects is the Net Present Value (NPV), as it considers the time value of money and expected rate of return to analyze profitability comprehensively. Option D is correct answer.
Step-by-step explanation:
The evaluation tool most useful when considering investment projects that are not mutually exclusive is the Net Present Value (NPV). The NPV is used to analyze the profitability of an investment or project by calculating the present value of expected cash flows, subtracting the initial investment, and considering the time value of money. When projects are not mutually exclusive, the NPV allows for the consideration of each project on its own merits, as well as in comparison with other potential projects.
Option (a), Initial Outlay (IO), is simply the upfront cost required to start a project and does not offer any insight into the project's profitability over time. The (b) Internal Rate of Return (IRR) is another useful metric for evaluating investments, as it represents the discount rate at which the NPV of future cash flows equals zero. However, IRR can be misleading when comparing projects of different sizes or durations. Meanwhile, (c) Probability Index (PI), also known as Profitability Index, is best used when available investment funds are limited. It helps to rank projects by their per-unit value creation; however, it doesn't necessarily provide a complete picture of the value added by the projects.
Given these options, the most comprehensive and universally applicable evaluation tool for non-mutually exclusive projects is the NPV. This tool accounts for expected rate of return, which encompasses future interest payments, capital gains, and increased profitability. Liquidity considerations also benefit from NPV analysis, as it informs when cash flows might occur and whether they align with the firm's liquidity needs. The correct option for the most useful evaluation tool for non-mutually exclusive investment projects is d) Net Present Value (NPV).