## Advantages and disadvantages of profitability index method

16 Aug 2018 Advantages of Profitability Index. Accept or Reject a Project. Let's consider that you are dealing with mutually exclusive projects where you 30 Nov 2018 The profitability index takes a different approach. You're using all of the cash flows that are generated from the business, even the one which are Advantages Of Profitability Index (PI) 1. PI considers the time value of money. 2. PI considers analysis all cash flows of entire life. 3. PI makes the right in the case The profitability index (PI) refers to the ratio of discounted benefits over the In addition to the aforesaid advantages, there are also certain disadvantages The Profitability Index (PI) measures the ratio between the present value of Using the profitability index method, which project should the company undertake ? Advantages of Profitability Index Disadvantages of the Profitability Index.

## All of the following are disadvantages of the Payback Period, except. The method incorporates the time value of money. What is the first step in the Net Present Value (NPV) process? All of the following are advantages of the Profitability Index, except:

Advantages of the Profitability Index The profitability index indicates whether an investment should create or destroy company value. It takes into consideration the time value of money and the risk of future cash flows through the cost of capital. Disadvantages of Profitability Index are:-. Only used for divisible projects. strategic value of projects are not considered.( only figures are dealt with not long term not short term. limited use when protect have differing cash flow pattern. The profitability index is an appraisal technique applied to potential capital outlays. The method divides the projected capital inflow by the projected capital outflow to determine the Advantages and Disadvantage of Profitability Index. Advantages of profitability index. a) Simple to understand and utilize. b) The part of NPV in the venture will show that venture is more powerful as the most profitable venture will contain the highest P.I. like the difference or total P.I. will continue to the company's profitability.

### Access the answers to hundreds of Profitability index questions that are The profitability index provides an advantage over the net present value method by

Advantages & Disadvantages of a Profitability Index. By: Diana Wicks. Share; Share on Facebook; The profitability index is a capital budgeting technique that compares present value of future inflows with the initial outflow, in ratio terms. It is calculated by dividing the present value of cash flows by initial investment of a project. Advantages And Disadvantages Of Profitability Index Advantages Of Profitability Index (PI) Main benefits or advantages of using profitability index method of evaluating investments can be explained as follows: 1. Widely Used Technique. Profitability Index (PI) is very easy to calculate. So, it is common and widely used technique to evaluate The net present value method will lead to the same decision because the NVP of Project Y of $5,386,887.43 is greater than the NPV of Project Z of $4,643,147.49. Advantages and Disadvantages. The advantage of the profitability index method is that it mathematically leads to the same decision for independent projects as the NPV method. Advantages And Disadvantages Of Profitability Index (PI) Advantages Of Profitability Index (PI) 1. PI considers the time value of money. 2. PI considers analysis all cash flows of entire life. 3. PI makes the right in the case of different amount of cash outlay of different project. 4. PI ascertains the exact rate of return of the project. Profitability Index – Advantages and Disadvantages. The advantage of profitability method is that it considers the time value of money and presents a relative profitability of the project. Relative profitability allows comparison of two investments irrespective of their amount of investment. 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

### Discuss advantages and disadvantages associated with the above techniques. Technique Compute the profitability index for each of the two projects. b.

There are certain advantages and disadvantages of using the Profitability Index as a measure to decide to proceed with which project. Advantages: –. The PI index internal rate of return criteria, profitability index, and the payback period method. calculating NPV, interpreting NPV, advantages and disadvantages of using The Proﬁtability Index is a variation of the Net Present Value approach to Each of the capital budgeting methods outlined has advantages and disadvantages. Discuss advantages and disadvantages associated with the above techniques. Technique Compute the profitability index for each of the two projects. b. importance in investment control. Keywords: net present value, internal rate of return, profitability index, payback period 1982) Illés (2002) emphasizes the disadvantages of NPV method The IRR method has the advantage of expressing. Profitability index method of capital expenditure evaluation is a version of net present of Capital Budgeting (With Examples, Advantages and Disadvantages) . How to calculate the discounted cash flow in payback period, one of several capital budgeting methods to evaluate capital projects.

## The net present value method will lead to the same decision because the NVP of Project Y of $5,386,887.43 is greater than the NPV of Project Z of $4,643,147.49. Advantages and Disadvantages. The advantage of the profitability index method is that it mathematically leads to the same decision for independent projects as the NPV method.

12 Sep 2015 Merits –. It is easy to calculate and simple to understand. It was an (ii) Post Pay- back Profitability Method – This method overcomes the limitations (iii) Profitability Index – It is calculated on the basis of NPV and expressed in percentage. of Organisation Structure and Its Advantages and Disadvantages. 11 Profitability Index Advantages and Disadvantages Nov 8, 2018 Nov 30, 2018 by Brandon Gaille The profitability index is a tool which investors can use to understand the degree of expected profits that may come from a specific investment. knowing the advantages and disadvantages of Profitability Index is a must before one uses this tool to judge various corporate projects. knowing the advantages and disadvantages of Profitability Index is a must before one uses this tool to judge various corporate projects. eFinanceManagement.com. MENU MENU. Home; Sources of Finance. Advantages & Disadvantages of a Profitability Index. By: Diana Wicks. Share; Share on Facebook; The profitability index is a capital budgeting technique that compares present value of future inflows with the initial outflow, in ratio terms. It is calculated by dividing the present value of cash flows by initial investment of a project. Advantages And Disadvantages Of Profitability Index Advantages Of Profitability Index (PI) Main benefits or advantages of using profitability index method of evaluating investments can be explained as follows: 1. Widely Used Technique. Profitability Index (PI) is very easy to calculate. So, it is common and widely used technique to evaluate

Advantages and Disadvantage of Profitability Index. Advantages of profitability index. a) Simple to understand and utilize. b) The part of NPV in the venture will show that venture is more powerful as the most profitable venture will contain the highest P.I. like the difference or total P.I. will continue to the company's profitability. Profitability Index Advantages Disadvantages 1. Tells whether an investment increases the firm's value 2. Considers all cash flows of the project 3. Considers the time value of money 4. Considers the risk of future cash flows (through the cost of capital) 5. Useful in ranking and selecting projects when capital is rationed 1. All of the following are disadvantages of the Payback Period, except. The method incorporates the time value of money. What is the first step in the Net Present Value (NPV) process? All of the following are advantages of the Profitability Index, except: All of the following are advantages of the Profitability Index, except: It is useful for comparing mutually exclusive investments. All of the following are useful for understanding Profitability Index, except: