Question

Identify a technique that is intended to rank capital budgeting projects in terms of desirability?

1) Payback period
2) Net present value
3) Internal rate of return
4) Profitability index

Answer 1

The Profitability Index (PI) is a technique used to rank capital budgeting projects by evaluating the amount of value created per unit of investment.

Step-by-step explanation:

A technique intended to rank capital budgeting projects in terms of desirability is the Profitability Index (PI). This index compares the present value of cash inflows generated by the project to the initial investment, effectively illustrating how much value is created per unit of investment.

For instance, a Profitability Index of 1.1 signals that for every dollar invested, the project is expected to yield a return of $1.10. Other techniques such as the Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR) are also used for evaluating capital budgeting projects, but the Profitability Index is particularly useful for ranking and comparing projects, especially when resources are limited.