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    Question

    The Profitability Index (PI) is an important capital

    budgeting tool that helps assess project feasibility. It is mathematically defined as:
    A Initial investment cost divided by total cash inflows Correct Answer Incorrect Answer
    B Ratio of the present value of future cash inflows to the initial investment cost Correct Answer Incorrect Answer
    C The internal rate of return (IRR) minus the discount rate Correct Answer Incorrect Answer
    D The payback period adjusted for depreciation Correct Answer Incorrect Answer
    E The ratio of book value to market capitalization Correct Answer Incorrect Answer

    Solution

    Profitability Index = Present Value of Future Cash Flows / Initial Investment. A PI > 1 indicates a profitable project. It accounts for the time value of money and is useful for comparing mutually exclusive projects.

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