Question

A positive profitability index indicates a positive net present value. True or False

Answer 1

--FALSE
This is because a Profitability Index of ONLY 1 or greater than 1 indicates a positive net present value.
Profitability Index is never negative.

--

--Profitability Index = Present value of net cash flows / Initial Investment
AND
--Net present value = Present value of net cash flows - Initial Investment.

--Net Present value will be POSITIVE if Present value of net cash flows are MORE than initial Investment.
--Present values of net cash flows HIGHER than Initial Investment means that NUMERATOR value (in calculating Profitability Index) is also HIGHER, which will give Profitability Index a POSITIVE value.

--Example

Workings	Cases	1	2	3	4	5
A	Present Values	$200,000	$150,000	$500,000	$500,000	$300,000
B	Initial Investments	$150,000	$150,000	$600,000	$400,000	$350,000
C= A/B	Profitability Index	1.33	1.00	0.83	1.25	0.86
D = A - B	Net Present Values	$50,000	$0	($100,000)	$100,000	($50,000)