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profitability index (PI)

The present value of an investment's future cash flows divided by its initial cost. Also, benefit-cost ratio.

Advantages and Disadvantages of the Profitability Index

Advantages

Disadvantages

1. Closely related to NPV, generally leading to identical decisions.

2. Easy to understand and communicate.

3. May be useful when available investment funds are limited.

1. May lead to incorrect decisions in comparisons of mutually exclusive investments.

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