A project's profitability index is equal to the ratio of the of a project's future cash flows to the project's.
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A. B. C. D.A
The profitability index (PI) is a financial performance metric that helps in evaluating the potential profitability of an investment or project. It is also known as the profit investment ratio (PIR), investment profitability index (IPI), or value investment ratio (VIR).
The PI is calculated by dividing the present value of the project's future cash flows by the initial cash outlay or initial investment required to implement the project. The formula for calculating the PI is as follows:
PI = Present Value of Future Cash Flows / Initial Cash Outlay
The present value of future cash flows is the sum of the discounted cash flows expected to be generated by the project over its life. The initial cash outlay is the cost of acquiring and implementing the project, including capital expenditures and working capital requirements.
Given the answer choices, the correct answer is A. Present value; initial cash outlay. The PI is calculated by dividing the present value of future cash flows by the initial cash outlay, not the net present value or depreciable basis.
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of the project. It is a measure of the profitability of an investment and is calculated by subtracting the initial cash outlay from the present value of future cash flows.
The depreciable basis is the cost of an asset that is subject to depreciation for tax purposes. It is not relevant to the calculation of the profitability index.
In summary, the profitability index is a useful metric for evaluating the potential profitability of an investment or project. It is calculated by dividing the present value of future cash flows by the initial cash outlay. The correct answer choice for the CTFA exam question is A. Present value; initial cash outlay.