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Which method is best for comparing projects of different sizes?
Which method is best for comparing projects of different sizes?
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Practice Questions
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Q1
Which method is best for comparing projects of different sizes?
Payback Period
Net Present Value
Internal Rate of Return
Profitability Index
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The Profitability Index is best for comparing projects of different sizes as it shows the value created per unit of investment.
Questions & Step-by-step Solutions
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Q
Q: Which method is best for comparing projects of different sizes?
Solution:
The Profitability Index is best for comparing projects of different sizes as it shows the value created per unit of investment.
Steps: 5
Show Steps
Step 1: Understand that projects can vary in size, meaning some require more investment than others.
Step 2: Learn about the Profitability Index (PI), which is a financial metric used to evaluate the attractiveness of an investment.
Step 3: Know that the Profitability Index is calculated by dividing the present value of future cash flows by the initial investment.
Step 4: Realize that the Profitability Index helps you see how much value each dollar invested in a project generates.
Step 5: Compare the Profitability Index of different projects to see which one provides more value per unit of investment, regardless of their size.
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