Advantages of profitability index
a) Simple to use and understand.
b) The element of NPV in the venture will indicate which venture is more powerful as the most profitable venture will have the highest P.I. as the difference or net P.I. will continue to the company’s profitability.
c) It acknowledges time value for money and at the same time the NPV of a venture at its present value which is consistent with investment appraisal requirements.
Disadvantages of profitability index
a) It may be useful under conditions of uncertain cost of finance used to discount inflows and yet this cost is a complex item due to the implicit and explicit element.
b) It may be difficult to ascertain if the economic life of a venture is long and it yields large inflows because their discounting may call for use of computers that are expensive.