Question

You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?
A) payback period
B) profitability index
C) net present value (NPV)
D) internal rate of return (IRR)

Answer 1

Answer: Option B

 

Explanation: The profitability index, referred to alternatively as the value investment ratio (VIR) or profit investment ratio (PIR), describes an indicator that measures the cost-benefit relationship of a proposed development.

The index of profitability is an evaluation methodology applicable to the possible expenditure of resources. The formula splits the estimated capital inflow to assess a project's viability by the expected capital outflow.

            It is important to understand how the methodology ignores contract scope when using the profitability index to assess the attractiveness of projects. As their profit margins are not as huge, projects with greater cash inflows may lead to lower profitability measure estimates.