Question

What is profitability Index? Which is a superior criterion-Profitability Index or Net Present Value?

  1. What is profitability Index? Which is a superior criterion-Profitability Index or Net Present Value?

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Answer #1

Profitability Index measures the proportion of dollar earned to a dollar cost of investment. If the Profitability Index is > 1, then the project is acceptable. Higher the PI, higher is the profitability of the index.

PI is used to compares and rank many investments based on the profitability of each investment.

NPV is a superior criterion because it measures the magnitude of the profit while PI is used only to compares and rank many investments based on the profitability of each investment.

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