Q. Describe about Profitability Index?

Profitability Index OR (PI):- Second method of estimate a project through discounted cash flows is profitability index method. This method is also called Benefit-Cost Ratio.

This method is alike to NPV approach. A main drawback of the NPV method was that it doesn't give satisfactory results while evaluating the projects requiring different initial investments. PI method offers a solution to this problem.

PI =    Present Value of Cash Inflows/ Present Value of Cash Outflows

Accept-Reject Criteria:-

• If PI is in excess of one the project will be accepted
• If PI is below one, the project will be rejected.
• If PI is one project perhaps accepted only on the basis of non-financial considerations.