Critique the profitability index (PI) as a method for evaluating investment projects.
Understand the Problem
The question asks for a critique of the profitability index (PI) as a method for evaluating investment projects. It presents four options for assessment, focusing on the limitations of the profitability index.
Answer
C. PI does not consider the scale of the investment.
The final answer is C. PI does not consider the scale of the investment.
Answer for screen readers
The final answer is C. PI does not consider the scale of the investment.
More Information
The Profitability Index is valuable for comparing profitability but does not account for the size of the investment, meaning a larger project could appear less attractive due to smaller relative returns.
Tips
A common mistake is assuming PI accounts for all factors like NPV. PI focuses on relative profitability, not absolute size.
Sources
- Profitability Index (PI) Rule: Definition, Uses, and Calculation - investopedia.com
- Learn How to Calculate the Profitability Index - corporatefinanceinstitute.com
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