Difference between revisions of "Profitability index"

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(Change "is" to "may be".)
(Classify as investment appraisal.)
 
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(PI). The profitability index may be represented by the following formula:
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(PI).  
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''Investment appraisal''
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The profitability index of a project or other proposed investment may be represented by the following formula:
  
 
Profitability index = PV/Co
 
Profitability index = PV/Co
  
 
Where:  
 
Where:  
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PV = the present value of all the cashflows except the initial investment.
 
PV = the present value of all the cashflows except the initial investment.
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Co = the absolute value of the initial investment.
 
Co = the absolute value of the initial investment.
  
Projects with a PI > 1 are acceptable.
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Calculated on this basis, projects with a PI > 1 are acceptable.
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==Alternative definition==
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The profitability index may also be represented by the following alternative formula:
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Profitability index = NPV/Co
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Where:
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NPV = net present value of all positive and negative cashflows, including the initial investment outflow Co
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When defined on this alternative basis, the minimum threshold of acceptability becomes a profitability index of 0.
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== See also ==
 
== See also ==
 
* [[Capital rationing]]
 
* [[Capital rationing]]
 
* [[Present value]]
 
* [[Present value]]

Latest revision as of 21:27, 11 April 2016

(PI).

Investment appraisal

The profitability index of a project or other proposed investment may be represented by the following formula:

Profitability index = PV/Co

Where:

PV = the present value of all the cashflows except the initial investment.

Co = the absolute value of the initial investment.


Calculated on this basis, projects with a PI > 1 are acceptable.


Alternative definition

The profitability index may also be represented by the following alternative formula:

Profitability index = NPV/Co

Where:

NPV = net present value of all positive and negative cashflows, including the initial investment outflow Co


When defined on this alternative basis, the minimum threshold of acceptability becomes a profitability index of 0.


See also