## Disadvantage of profitability index method

23 Oct 2016 The final advantages are that the NPV method takes into consideration the cost of capital and the risk inherent in making projections about the requiring different operating periods, the profitability index method (PIM) is an adequate tool which can give a competitive advantage to assess at a very The first disadvantage is that NPV is only as accurate as the inputted information. Another disadvantage of the net present value method is that it requires the 30 Oct 2012 Disadvantages of internal rate of return method: 1. It is difficult to understand. 2. The result of NPV and IRR differs. iii) Profitability index or benefit 7 Feb 2018 The discounted cash flow method includes the NPV method, profitability helps to overcome the disadvantages of the payback period method.

## A business may not have access to sufficient funds to take advantage of all potentially profitable projects. The scale of the investment. A massive project may soak

Disadvantages of the Profitability Index The profitability index requires an estimate of the cost of capital to calculate. In mutually exclusive projects where the initial investments are different, it may not indicate the correct decision. Profitability index method measures the present value of benefits for every dollar investment. It involves the ratio that is created by comparing the ratio of the present value of future cash flows from a project to the initial investment in the project. The correct way to solve this problem would be to choose the projects starting from the highest profitability index until cash is depleted: Projects B, A, F, E, and D. This would yield an NPV of $545,000. Disadvantages of the Profitability Index. The profitability index requires an estimate of the cost of capital to calculate. Profitability Index – Advantages and Disadvantages The advantage of profitability method is that it considers the time value of money and presents a relative profitability of the project. Relative profitability allows comparison of two investments irrespective of their amount of investment. Disadvantages of Profitability Index are:- Only used for divisible projects strategic value of projects are not considered.( only figures are dealt with not long term not short term limited use 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.

### Profitability index method measures the present value of benefits for every dollar investment. It involves the ratio that is created by comparing the ratio of the present value of future cash flows from a project to the initial investment in the project.

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. (iii) Benefit cost Ratio or Profitability Index Method: One major disadvantage of the present value method is that it is not easy to rank projects on the basis of net present value particularly when the cost of projects differ significantly. To compare such projects the present value profitability index is prepared. Profitability index method measures the present value of benefits for every dollar investment. It involves the ratio that is created by comparing the ratio of the present value of future cash flows from a project to the initial investment in the project. Profitability Index Advantages Disadvantages 1. Tells whether an investment increases the firm's value 2. Considers all cash flows of the project 3. Considers the time value of money 4. Considers the risk of future cash flows (through the cost of capital) 5. Useful in ranking and selecting projects when capital is rationed 1. Profitability Index Method. Profitability index serves as a tool to classify projects. If the value of the index is bigger, then the project would be more attractive. The acceptable measure of profitability index for a single project is 1.0 or more. This suggests that the business will move forward. But if it is lower than 1.0, the project

### There are certain advantages and disadvantages of using the Profitability Index as a measure to decide to proceed with which project. Advantages: –. The PI index

14 Nov 2015 The final advantages are that the NPV method takes into consideration the cost of capital and the risk inherent in making projections about the Unlike NPV, IRR and MIRR, the criterion used in discounted payback method centers more on profitability rather than liquidity. This method has many advantages

## 30 Oct 2012 Disadvantages of internal rate of return method: 1. It is difficult to understand. 2. The result of NPV and IRR differs. iii) Profitability index or benefit

Request PDF | Modified Profitability Index and Internal Rate of Return The drawbacks of the IRR include multiple rates, the assumption that cash flows are method (MIRR), which overcomes the IRR's limitations, and the profitability index

Advantages and Disadvantages of Profitability Index Profitability Index (PI) is a capital budgeting tool which helps to decide whether to accept or reject a project. The formula of PI is PI = Present values of inflows/ present values of outflows. Advantages & Disadvantages of a Profitability Index Easy to Understand. Time Value. Calculating present value of cash flows involves discounting the cash flows by Incorrect Comparisons. A major disadvantage of profitability index is that it may lead Estimates Cost of Capital. The Advantages and Disadvantages The advantage of the profitability index method is that it mathematically leads to the same decision for independent projects as the NPV method. Problems can arise, however, in case of mutually exclusive projects if they differ in size of investment. Major drawbacks or limitations of using profitability index method can be expressed as follows: 1. Estimation Of Cost Of Capital It is difficult to estimate cost of capital and interest rate or discount rate to determine the profitability index of the project.