Question

the profitability index will be bigger than one for a (negative/positive) npv investment and less than one for a (negative/positive) npv investment. true or false

Answer 1

The statement is true; a profitability index greater than 1 indicates a positive NPV investment which is profitable, and less than 1 indicates a negative NPV investment which is not profitable.

Step-by-step explanation:

The profitability index is a tool used in capital budgeting to decide whether or not an investment should be undertaken. A profitability index (PI) greater than 1 indicates a positively NPV investment, meaning that the present value of future cash flows is greater than the project's initial cost, suggesting that it's profitable. Conversely, a profitability index less than 1 corresponds to a negatively NPV investment, indicating that the present value of future cash flows is less than the project's initial cost, and thus it's not profitable. Therefore, the statement is true.

Answer 2

The profitability index will be bigger than one for a negative npv investment and less than one for a positive npv investment.

Step-by-step explanation:

The statement is true. The profitability index is a financial ratio that measures the value of an investment by comparing the present value of its cash inflows to the present value of its cash outflows. The profitability index of an investment can be calculated by dividing the present value of the cash inflows by the present value of the cash outflows.

If the NPV of an investment is positive, it means that the present value of the cash inflows is greater than the present value of the cash outflows, indicating a profitable investment. In this case, the profitability index will be larger than one, as the numerator (present value of cash inflows) is greater than the denominator (present value of cash outflows).

Conversely, if the NPV of an investment is negative, it means that the present value of the cash inflows is less than the present value of the cash outflows, indicating an unprofitable investment. In this case, the profitability index will be less than one, as the numerator (present value of cash inflows) is smaller than the denominator (present value of cash outflows).