Profitability Index Method: Definition & Calculations


Choose an answer and hit 'next'. You will receive your score and answers at the end.

question 1 of 3

Jane is the owner of an antique store. She currently rents the building out of which she runs her business. Jane learns that her landlord is selling the building and giving her the first opportunity to purchase it. Jane is interested in the offer but wants to be certain that she is making a good investment. After calculating the profitability index, Jane comes up with the number two. Based on this number, should Jane purchase the building? Why or why not?

Create Your Account To Take This Quiz

As a member, you'll also get unlimited access to over 79,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.

Try it risk-free
Try it risk-free for 30 days. Cancel anytime
Already registered? Log in here for access

1. Larry is the owner of a men's clothing store and is interested in expanding his inventory to include shoes. After calculating the profitability index, Larry concludes that at best, he will break even if he adds shoes to his inventory. Which of the following BEST describes why Larry came to this conclusion?

2. If you're making an investment, why is it important to understand the present value of future cash flows?

Create your account to access this entire worksheet
A Premium account gives you access to all lesson, practice exams, quizzes & worksheets
Access to all video lessons
Quizzes, practice exams & worksheets
Certificate of Completion
Access to instructors
Create an account to get started Create Account

About This Quiz & Worksheet

These quiz questions were developed by our instructors as an assessment of your knowledge of the meaning of the terms used in the profitability index method. You will be tested on your understanding of what various indexes mean and how to do index calculations.

Quiz & Worksheet Goals

We will ask you about the meaning of index terms like:

  • An index of 2
  • An index of 1
  • An index slightly above or slightly below 1
  • Calculation of profitability index

Skills Practiced

You will test such skills as:

  • Interpreting information - verify that you can review information regarding profitability index above and below 1 and interpret it correctly
  • Information recall - access the knowledge you've gained regarding calculating the profitability index
  • Knowledge application - use your knowledge to identify if a project is likely to make or lose money

Additional Learning

For more on this subject, study the lesson titled Profitability Index Method: Definition & Calculations. This lesson will have you:

  • Examine the present value of future cash flows
  • See the role of initial investment in profitability
  • Look at the three possible outcomes
  • Analyze examples