Practice Question
A profitability index (PI) of less than 1 indicates that the present value of future cash flows is less than the initial investment.
Answer +
TRUE
Step-by-step solutions +
A PI (Profitability Index) is calculated as:
PI = Present Value of Future Cash Flows / Initial Investment
If PI < 1, then the Present Value (PV) of cash inflows is less than the initial investment. This implies a negative Net Present Value (NPV), which suggests the project is not financially viable.
Therefore, a PI less than 1 is a red flag for investors, indicating the project is expected to lose value rather than create it.
PI = Present Value of Future Cash Flows / Initial Investment
If PI < 1, then the Present Value (PV) of cash inflows is less than the initial investment. This implies a negative Net Present Value (NPV), which suggests the project is not financially viable.
Therefore, a PI less than 1 is a red flag for investors, indicating the project is expected to lose value rather than create it.