Profitability index: Difference between revisions
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imported>Doug Williamson (Add alternative calculation.) |
imported>Doug Williamson (Classify as investment appraisal.) |
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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 | ||
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.
