ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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What is the formula for calculating the Profitability Index?

PV of Cash Inflows / Initial Cash Outflows
Total Cash Flows / Initial Investment
Initial Investment / PV of Cash Inflows
Net Present Value / Total Investment Costs

The correct answer is: PV of Cash Inflows / Initial Cash Outflows

The Profitability Index (PI) is a financial metric used to assess the desirability of an investment or project. It is calculated by dividing the present value of cash inflows by the initial cash outflows. This ratio helps to determine the excess value or return generated for each unit of investment made. A profitability index greater than one indicates that the present value of cash inflows exceeds the initial investment, suggesting that the project adds value and is worth pursuing. By using the formula, you can effectively evaluate investment opportunities; a higher PI indicates a more favorable investment, as it shows how much value is created per unit of investment. Thus, this formula is vital for decision-making in capital budgeting scenarios, allowing investors to compare and prioritize multiple projects based on their projected profitability.