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Profitability Index

The problem with the above method crops up when we want to compare two or more dissimilar (different sized) projects. A mega project may yield a very large NPV sum, whereas a mini Project may yield a very small NPV; but that should not mean that a mega project is commercial; y more profitable than a mini project. To facilitate comparison in such cases, it is suggested that in place of deviation (i.e., GPV – I), one should use a ratio (GPV/I) criteria, because ratios facilitate meaningful comparisons, without creating any bias because of factor like size of project, size and spread of return and costs, life of the project etc. Also note that these ratios is named as index, to be exact, profitability index. For example,

Normally, one would like to choose a project with positive PVN or high NPVI coefficient. In case pubic (Social) projects, social desirability may compel the administrator to choose a project with zero (or even negative) NPV implying NPVI equal to (or less than) unity.

In our example, the NPVI