# Difference between revisions of "Profitability index"

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(Classify as investment appraisal.) |
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(PI). | (PI). | ||

− | The profitability index may be represented by the following formula: | + | ''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 |

## 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.