Profitability index: Difference between revisions
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(PI). | (PI). | ||
The profitability index may be represented by the following formula: | ''Investment appraisal.'' | ||
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 | ||
| Line 12: | Line 14: | ||
Calculated on this basis, projects with a PI > 1 are acceptable. | |||
The profitability index is also sometimes known as the ''Benefit-Cost Ratio (BCR).'' | |||
==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 == | == See also == | ||
* [[Capital rationing]] | * [[Capital rationing]] | ||
* [[Net present value]] | |||
* [[Payback period]] | |||
* [[Present value]] | * [[Present value]] | ||
[[Category:The_business_context]] | |||
[[Category:Corporate_finance]] | |||
[[Category:Investment]] | |||
[[Category:Long_term_funding]] | |||
[[Category:Identify_and_assess_risks]] | |||
[[Category:Manage_risks]] | |||
[[Category:Risk_frameworks]] | |||
[[Category:Risk_reporting]] | |||
Latest revision as of 12:23, 13 June 2022
(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.
The profitability index is also sometimes known as the Benefit-Cost Ratio (BCR).
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.
