The Profitability Index is the ratio of benefit arrived and cost incurred for the project. However, the benefits are the present value of cash flows occur during the period of project and cost is the present value of cash outflows on the project. The Profitability index is used in capital rationing where the projects are ranked in order of preference on the basis of profitability index. The project with highest profitability index is ranked first and so on in descending order of profitability index. The Concept underlying the Profitability Index method and its application need to be determined.

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Chapter 26, Problem 24RQ

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The Profitability Index is the ratio of benefit arrived and cost incurred for the project. However, the benefits are the present value of cash flows occur during the period of project and cost is the present value of cash outflows on the project. The Profitability index is used in capital rationing where the projects are ranked in order of preference on the basis of profitability index. The project with highest profitability index is ranked first and so on in descending order of profitability index.

The Concept underlying the Profitability Index method and its application need to be determined.

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