When the profitability index is greater than one, that means the present value of the cash inflows from the project (the numerator in the PI) is greater than the present value of the cash outflows from the project (the denominator in the PI). And that, in turn, means that the NPV of the project must be positive. If the company is not subject to any capital rationing, a project with a positive NPV is an acceptable project. Thus, a project with a profitability index of greater than 1 is also an acceptable project.
The internal rate of return and the accounting rate of return are different measurements and provide very different information. Evaluating one against the other is not meaningful.
The accounting rate of return is the increase in the expected annual average after-tax accounting net income divided by the net initial investment or the average investment. The accounting rate of return is a percentage rate of return and zero is not a percentage rate of return.
If the initial investment were greater than the present value of the expected future cash inflows, the project would have a negative net present value and would be unacceptable.
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