Basics of Capital Budgeting Evaluating Cash Flows
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- Published
- 25 Oct 2021
- Last updated
- 28 May 2026
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Explanation
The profitability index is calculated by dividing the present value of future cash inflows by the initial project cost, providing a measure of the project's relative profitability.
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Practice related questions from the same subject.
- 1.Which of the following techniques are used to assess the viability of investment projects?
- 2.What do we call projects whose cash flows are not influenced by one another?
- 3.If a project's cash inflows are lower than the initial investment discounted at the required rate of return, what will be the net present value?
- 4.If the present value of expected future cash inflows is $4150 and the initial investment is $1300, what is the profitability index?
- 5.Which type of numbers represent the cash inflows, or revenues, of a project?
- 6.During extensive expansion initiatives, how do the heightened risks and flotation expenses of a project typically affect the marginal cost of capital?
- 7.If the initial investment is $6,000 and the profitability index is 5.6, what is the present value of the expected cash inflows?
- 8.Which concept leads to challenges such as a rising marginal cost of capital and the need for capital rationing?
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