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What is the advantages and disadvantages of profitability index?
Wiki User
∙ 7y ago
Profitability Index Advantages
- Tells whether an investment increases the firm's value
- Considers all cash flows of the project
- Considers the time value of money
- Considers the risk of future cash flows (through the cost of capital) Useful in ranking and selecting projects when capital is rationed
- Requires an estimate of the cost of capital in order to calculate the profitability index
- May not give the correct decision when used to compare mutually exclusive projects
Wiki User
∙ 7y ago
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