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What are the differences between profitability index and net present value?
Wiki User
∙ 11y ago
The NPV and PI both consider the time value of money and result in the same accept or reject decision when
considering an independent project. The main difference between the two is that the PI may be useful in determining which projects to accept if funds are limited;
however, the PI may lead to incorrect decisions when considering mutually exclusive investments
Wiki User
∙ 11y ago
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What is a profitability index?
Profitability index is the "rolling forward" of indices of profitability. For example, a company has a turnover of
The net present value and profitability index methods to give consistent accept-reject decisions?
Yes, The PI and NPV always give the same decisions to accept or reject the projects. The Project's PI will be greater than 1.00 if the NPV is positive and PI will be less than 1.00 if the NPV is negative
What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?
Profitability index criteria can be used to select projects when a capital rationing situation exists, with the highest profititibility index from specified projects being the goal.
Advantage and disadvantage of Profitability index PI?
Disadvantages of Profitability Index are:-Only used for divisible projectsstrategic value of projects are not considered.( only figures are dealt with not long term not short termlimited use when protect have differing cash flow pattern. ( only limited to investment with major cash at the beginning)absolute NPV vale is ignored, smaller projects receive more favourable treatment ( the equation treats all project as equally important.R.ogunleye university of Herfordshire (UK)
What is the difference between mutual funds and index funds?
Index funds are a type of mutual fund that invests in the stocks of a specific market index, attempting to maintain a value per unit that tracks that index.
What is a profitability index?
Profitability index is the "rolling forward" of indices of profitability. For example, a company has a turnover of
How do you compute the profitability index of a capital-budgeting proposal?
Dividing the present value of the annual after-tax cash flows by the cost of the project
How does one create a profitability index?
Profitability indexes are not hard to come by. To create one you must go online to a profitability website in which they have step by step instructions according to the index you need.
Payback period versus discounted payback period versus net present value versus profitability index?
discounted payback period
For the NPV criteria a project is acceptable if the NPV is while for the profitability index a project is acceptable if the profitability index is?
less than zero, greater than the requred return
Why is profitability index considered more in capital budgeting appraisal than net present value and internal rate of return?
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When hard capital rationing exist project may be accurately evaluated by use of what?
Profitability Index
An index of regional disparity would be useful in examining?
Economic differences between different regions of a country
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What has the author Ray I Reul written?
Ray I. Reul has written: 'Profitability index for investments' -- subject(s): Capital investments
Differences between index and direct test?
The indirect test is one that you might find out about while researching. The direct testis what you are looking for.
What is the advantages and disadvantages of profitability index?
Profitability Index AdvantagesTells whether an investment increases the firm's valueConsiders all cash flows of the projectConsiders the time value of moneyConsiders the risk of future cash flows (through the cost of capital) Useful in ranking and selecting projects when capital is rationedDisadvantagesRequires an estimate of the cost of capital in order to calculate the profitability indexMay not give the correct decision when used to compare mutually exclusive projects
