# Difference between revisions of "Profitability index"

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(Change "is" to "may be".) |
(Classify as investment appraisal.) |
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− | (PI). The profitability index may be represented by the following formula: | + | (PI). |

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+ | ''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 | ||

Where: | Where: | ||

+ | |||

PV = the present value of all the cashflows except the initial investment. | PV = the present value of all the cashflows except the initial investment. | ||

+ | |||

Co = the absolute value of the initial investment. | Co = the absolute value of the initial investment. | ||

− | + | ||

+ | Calculated on this basis, projects with a PI > 1 are acceptable. | ||

+ | |||

+ | |||

+ | ==Alternative definition== | ||

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+ | The profitability index may also be represented by the following alternative formula: | ||

+ | |||

+ | Profitability index = NPV/Co | ||

+ | |||

+ | Where: | ||

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+ | NPV = net present value of all positive and negative cashflows, including the initial investment outflow Co | ||

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+ | 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]] | ||

* [[Present value]] | * [[Present value]] |

## 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.