When is Profitability Index better than IRR for ranking?

PI is better for capital rationing because it accounts for investment size. With $1M capital, two $500K projects with PI of 1.3 each provide more total NPV than one $1M project with PI of 1.2.

What is the decision rule for PI?

Accept projects with PI > 1.0, which is equivalent to NPV > 0. Under capital rationing, rank by PI and accept the highest-PI projects until the capital budget is exhausted.

What are the limitations of PI for capital rationing?

PI works perfectly only for independent projects with a single capital constraint. For projects with interdependencies or multi-period capital constraints, integer programming is technically required.

Capital Rationing Profitability Index Calculator

Rank projects under capital constraints using the Profitability Index: PI = NPV / Initial Investment. Maximizes total NPV when capital is limited and projects cannot be scaled.

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Frequently Asked Questions

When is Profitability Index better than IRR for ranking?

What is the decision rule for PI?

What are the limitations of PI for capital rationing?