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profitability index

Page history last edited by PBworks 15 years, 9 months ago

Profitability Index

 

ration of PV of future expected cash flows after initial investment / amount of initial investment

 

 

P.I. = PV cash flows (excluding initial) / Initial

 

Acceptance Criteria

 

whenever P.I. >1 ...accept project

reject if P.I < 1

 

 

 

Mutually Exclusive Projects

 

Similar warning as with IRR analysis = be careful of comparing P.I between two projects. You can not just pick the higher PI and assume that you picked the higher NPV. This is not always the case. You should always compare the net present value

 

PI ignores the scale aspect of the two projects

 

 

Incremental analysis fixes the flaw

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