Final answer:
The correct answer is b) Deducts, exceeds. NPV deducts the initial investment from the present value of future cash flows, while Profitability Index is calculated by dividing the present value of future cash flows by the initial investment.
Step-by-step explanation:
The correct answer to the question is b) Deducts, exceeds. This answer addresses the way that the Net Present Value (NPV) and the Profitability Index (PI) treat the initial investment when evaluating the attractiveness of an investment. NPV calculates the present value of future cash flows and then deducts the initial investment from this total. If the NPV is positive, it means the present value of future cash flows exceeds the initial investment, making the investment potentially profitable. Conversely, the Profitability Index is a ratio that exceeds when the present value of all future cash flows is divided by the initial investment. A PI greater than 1 indicates that for every dollar invested, there is a return that exceeds the original investment.