Profitability index: Difference between revisions
imported>Doug Williamson (Add alternative name - source - CFI - https://corporatefinanceinstitute.com/resources/knowledge/finance/benefit-cost-ratio-bcr/) |
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The profitability index of a project or other proposed investment may be represented by the following formula: | The profitability index of a project or other proposed investment may be represented by the following formula: | ||
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.
