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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
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