Question

5. Which of the following statements is​ FALSE? A. If there is a fixed supply of resources​ available, so that you cannot undertake all possible​ opportunities, then simply picking the highest NPV opportunity might not lead to the best decision. B. The profitability index is calculated as the NPV divided by the resources consumed by the project. C. If there is a fixed supply of a resource​ available, you should rank projects by the profitability​ index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed. D. Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources.

Answer 1

C.) is false

A, B and D are true as the resources with constant cash flow so, A will be used as it reflects that more the profitability index the better the project but we generally take which has highest profitability

Option D is also correct as NPV, IRR and other measures of capital budgeting which may be differentiated and one of the measures is PI also.

Option A as two prrojects might havee same NPV but Cash flows may be high intially later same may rise or other project may have low Cash flows and the same may rise later.

B option is the formula for PI.