When comparing potential capital investments of different sizes, management should choose the one with the:

The profitability index is a key metric used in capital budgeting that helps evaluate the attractiveness of an investment. It is calculated by dividing the present value of future cash flows by the initial investment cost. A higher profitability index indicates that an investment is expected to generate more value per dollar invested, making it an effective indicator for comparing investments of different sizes.

When management is faced with the decision of selecting between potential capital investments, focusing on the highest profitability index allows them to prioritize projects that will yield the most efficient returns. This is particularly useful when the investments vary significantly in terms of scale, as it normalizes the evaluation and helps to identify which project offers the best return on investment.

While factors such as investment cost, payback period, and total cash inflow are important considerations, they do not account for the efficiency of the investment relative to its size. The profitability index effectively balances the relationship between the value created and the investment required, leading to more informed decision-making in capital budgeting.