Advantages and disadvantage of profitability index, Finance Basics

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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.

c) It allows time value for money and at the similar time the NPV of a venture at its present value that is consistent by investment appraisal requirements.

Disadvantages of profitability index

a) It may be helpful under situation of uncertain cost of finance used to discount inflows and yet this cost is a complex item because of the explicit and implicit part.

b) It may be not easy to ascertain whether the economic life of a venture is long and it yields large inflows since their discounting may call for utilize of computers such are expensive.


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