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Which is the optimal technique or rule for ranking investment proposals?
A) The NPV ranking
B) The profitability index
C) The IRR ranking
D) There is no optimal technique; all techniques are flawed where proposals have different lives.
Profitability Index
A calculation that measures the profitability of an investment, determined by dividing the present value of future cash flows by the initial investment cost.
NPV Ranking
A method of evaluating investment opportunities by ranking them based on their Net Present Value, which estimates the present value of future cash flows minus initial investments.
IRR Ranking
The process of ordering investments or projects by their Internal Rate of Return, which estimates profitability.
- Cultivate the skill to evaluate and classify investment projects by applying various financial instruments such as net present value (NPV), internal rate of return (IRR), and profitability indexes.
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Learning Objectives
- Cultivate the skill to evaluate and classify investment projects by applying various financial instruments such as net present value (NPV), internal rate of return (IRR), and profitability indexes.
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