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List and briefly discuss the advantages and disadvantages of the profitability index decision criteria.

List and briefly discuss the advantages and disadvantages of the profitability index decision criteria.

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Answer #1

The advantages of profitability index are as follows:-

1) It takes into consideration the time value of money as the Npv is added to initial investment.

2) It helps in comparing and choosing between two projects.

The disadvantages of profitability index are as follows:-

1) it does not take into consideration the sunk cost. For eg:- a machine bought earlier but being used in the new project.

2) It ignores the lives of project. Two projects may have different lives due to which the comparibility may not be correct.

3) It does not take into consideration the opportunity cost .

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