Profitability index and Useful life: Difference between pages

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imported>Doug Williamson
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(Add quote from IAS 16 - https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-a/ias-16-property-plant-and-equipment.pdf?bypass=on)
 
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(PI).  
''Accounting''.
The length of time an asset is in use.  


''Investment appraisal.''
The asset should be depreciated over its useful life.


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


Profitability index = PV/Co
:<span style="color:#4B0082">'''''Estimation of useful life for IAS 16 financial reporting is a matter of judgement'''''</span>


Where:  
:"The useful life of an asset is defined in terms of the asset’s expected utility to the entity.


PV = the present value of all the cashflows except the initial investment.
:The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset.  


Co = the absolute value of the initial investment.
:Therefore, the useful life of an asset may be shorter than its economic life.  


:The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets."


Calculated on this basis, projects with a PI > 1 are acceptable.
:''IAS 16 - Property, plant and equipment - paragraph 57.''




The profitability index is also sometimes known as the ''Benefit-Cost Ratio (BCR).''
== See also ==
* [[Accounting]]
* [[Asset management]]
* [[Depreciating asset]]
* [[Depreciation]]
* [[Economic life]]
* [[Financial reporting]]
* [[IAS 16]]
* [[Judgement]]
* [[Life]]
* [[Property, plant and equipment]]
* [[Reporting entity]]
* [[Short life asset]]
* [[Useful economic life]]
* [[Utility]]




==Alternative definition==
==Other resource==
*[https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-a/ias-16-property-plant-and-equipment.pdf?bypass=on IAS 16 text]]


The profitability index may also be represented by the following alternative formula:
[[Category:Accounting,_tax_and_regulation]]
 
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 ==
* [[Capital rationing]]
* [[Net present value]]
* [[Payback period]]
* [[Present value]]


[[Category:The_business_context]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]

Revision as of 21:12, 29 October 2023

Accounting.

The length of time an asset is in use.

The asset should be depreciated over its useful life.


Estimation of useful life for IAS 16 financial reporting is a matter of judgement
"The useful life of an asset is defined in terms of the asset’s expected utility to the entity.
The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset.
Therefore, the useful life of an asset may be shorter than its economic life.
The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets."
IAS 16 - Property, plant and equipment - paragraph 57.


See also


Other resource