11.3 Other Investment Criteria
Although the NPV investment criterion makes the most sense in theory, in practice financial managers use a number of criteria to evaluate investment opportunities. Criteria that we explore in this section include the profitability index, internal rate of return, modified internal rate of return, and payback period.
Profitability Index
The profitability index (PI) is a cost-benefit ratio equal to the present value of an investment’s future cash flows divided by its initial cost:3
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