The calculation of the profitability index (PI) is most helpful for which type of decisions?

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The profitability index (PI) is a capital budgeting technique that measures the potential profitability of an investment by dividing the present value of its future cash flows by the initial investment. This measure helps in ranking and selecting investment projects based on their ability to generate cash flows and create value for the firm. Therefore, it is most helpful for preference decisions, which involve choosing among different investment alternatives based on their expected profitability and other financial criteria. Screening decisions typically involve accepting or rejecting investment proposals based on predetermined financial or strategic criteria, while qualitative decisions rely on non-financial factors such as corporate social responsibility, environmental impact, or ethical considerations. Short-term decisions are focused on operational or tactical issues, such as pricing, production, inventory management, or cost reduction, and do not require a long-term perspective.

The Calculation of the Profitability Index (PI) Is Most Helpful