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In this module, we have learned the concepts of Net Present Value and Profitability Index....

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Finance

In this module, we have learned the concepts of Net Present Value and Profitability Index. Which of the following is true?

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The Profitability Index allows the user to find out how fast the company will be recover the initial investments to the project in either future value or present (i.e. discounted) value.

Whereas Net Present Value (NPV) is computed dividing the total PV of earnings with the total PV of investments, Profitability Index is computed subtracting the PV of investments from the PV of earnings. This makes NPV a better tool in how much the project earned relative to the investments made, while Profitability Index is better in gauging the sheer amount of the profit generated.

NPV is a better option than Profitability Index in gauging how profitable the project will be relative to its costs, as it offers a ratio of the PV of earnings to the costs incurred.

None of the above (all of the above are incorrect statement).

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