Compare the use of NPV and PI in capital budgeting decisions.
Understand the Problem
The question is asking to compare the use of NPV (Net Present Value) and PI (Profitability Index) in capital budgeting decisions. It presents four options that suggest different aspects of how these two metrics are used in financial decision-making.
Answer
B. NPV provides an absolute measure of profitability, while PI provides a relative measure.
The final answer is: B. NPV provides an absolute measure of profitability, while PI provides a relative measure.
Answer for screen readers
The final answer is: B. NPV provides an absolute measure of profitability, while PI provides a relative measure.
More Information
NPV gives a dollar figure that can be compared, while PI shows efficiency as a ratio, useful for comparing project returns.
Tips
Confusing the use of absolute and relative metrics can lead to incorrect decisions when comparing project profitability.
Sources
- Profitability Index vs Net Present Value: Key Differences - IPG - ipgsf.com
- The Difference Between NPV & Profitability Index - westwoodnetlease.com
Thank you for voting!
