“If you can’t describe what you are doing as a process,
you don’t know what you’re doing”
W. Edwards Deming

Profitability Index

There are a number of tools that are commonly used for project evaluation: net present value, payback period, IRR and profitability index (PI).

Profitability index measures value created per unit invested.

It helps in assessing which project to choose from a number of projects: the higher the profitability index, the more attractive the project.

Comments

  1. Dear Hedieh,

    Thank you for your valuable feedback on the Profitability Index handbook. We will surely try to explore the pitfalls of the profitability index and add it in the handbook.

  2. Dear Ramendra, Thanks for this useful guide. I suggest that you add an additional slide explaining the pitfalls of the profitability index and to mention that while choosing among mutually exclusive projects, one should still rank projects based on their NPV. Looking at projects with different size ( initial Investment), relying on profitability index might result in the wrong choice of project. Thanks.

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