10. Which is typically higher the regular Profitability Index or the Modified Profitability index for the...

10. Which is typically higher the regular Profitability Index or the Modified Profitability index for the same project?

Expert Solution

The regular Profitability index(PI) is typically higher than the Modified Profitability index(MPI).

Profitability index(PI)

It is measure of project's attractiveness. It represents the relationship between the costs and benefits of a project.

PI = 1 + (NPV / Initial investment)

A project with PI greater than 1 is considered good and can be accepted.

Modified Profitability index(MPI)

The modified profitability index(MPI) is a measure of the value increase per present value dollar of initial commitment. MPI is similar to PI but it adds PV of all future commitments to the denominator.

MPI = 1 + (NPV / (initial outlay + PV of future commitments))

It is preferable to use a MPI, which is calculated by subtracting the cost of capital from the standard PI.

Hence, MPI is lower than PI.

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jeff jeffy answered 1 year ago

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