What is the advantages and disadvantages of profitability index?

Profitability Index Advantages

• Tells whether an investment increases the firm's value
• Considers all cash flows of the project
• Considers the time value of money
• Considers the risk of future cash flows (through the cost of capital) Useful in ranking and selecting projects when capital is rationed

• Requires an estimate of the cost of capital in order to calculate the profitability index
• May not give the correct decision when used to compare mutually exclusive projects