Manag., January-2017-Q5
- Option : D
- Explanation : Profitability Index (PI) or Benefit-Cost Ratio (B/C Ratio): Important time-adjusted capital budgeting technique is the profitability index (PI) or a benefit-cost ratio (B/C). It is similar to the NPV approach. The profitability index approach measures the present value of returns per rupee invested, while the NPV is based on the difference between the present value of future cash inflows and the present value of cash outlays. A major shortcoming of the NPV method is that being an absolute measure, it is not a reliable method to evaluate projects requiring different initial investments. The PI method provides a solution to this kind of problem. It is, in other words, a relative measure. It may be defined as the ratio which is obtained dividing the present value of future cash inflows by the present value of cash outlays. Symbolically,PI=Present value cash inflowsPresent value of cash outflows
This method is also known as the B/C ratio because the numerator measures benefits and the denominator costs. A more appropriate description would be the present value index.
