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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
What else can I help you with?
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Profitability index is the "rolling forward" of indices of profitability. For example, a company has a turnover of
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Another advantage of having a small business is greater profitability
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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.
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
What are the advantages and disadvantages of index numbers?
There are different types of index numbers, so the advantages and disadvantages would change depending on what type was used. However, in general, the main advantage is ease of use in finding a particular item on the index, the main disadvantage is that all items are treated equally, regardless of true value.
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