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SSC Audit Tax Finance P-II QUESTION #1227
Question 1
A project's profitability index is equal to the ratio of a project's future cash flows to the project's:
  • Present value; initial cash outlay✔️
  • Net present value; initial cash outlay
  • Present value; depreciable basis
  • Net present value; depreciable basis
Correct Answer Explanation
The Profitability Index (PI) is defined as: \(\text{PI} = \dfrac{\text{Present Value of Future Cash Flows}}{\text{Initial Cash Outlay}}\). It measures the value created per unit of investment. A PI greater than 1 indicates the project adds value. It is sometimes expressed as \(\text{PI} = 1 + \dfrac{\text{NPV}}{\text{Initial Outlay}}\).