Compare the profitability index (PI) with the net present value (NPV) method in terms of decision-making.
Understand the Problem
The question is asking for a comparison between the profitability index (PI) and net present value (NPV) in the context of investment decision-making, specifically focusing on their characteristics and differences.
Answer
B. PI provides a relative measure while NPV provides an absolute measure.
The final answer is B. PI provides a relative measure while NPV provides an absolute measure.
Answer for screen readers
The final answer is B. PI provides a relative measure while NPV provides an absolute measure.
More Information
The Profitability Index (PI) is a relative measure, indicating the value created per unit of investment. In contrast, Net Present Value (NPV) provides an absolute measure of the value created.
Tips
A common mistake is to assume that PI and NPV always provide the same decision result. While they often align, they differ if project sizes vary significantly.
Sources
- Profitability Index vs Net Present Value: Key Differences - IPG - ipgsf.com
- The Difference Between NPV & Profitability Index - westwoodnetlease.com
