Profitability Index, usually the abbreviation PI is used. It expresses the ratio of benefits to initial capital expenditures.
- PI…. profitability index
- I… initial capital expenditure
- CFt… cash flow in each year
- n… project lifetime
- r… discount interest rate
The project is acceptable if the resulting value is greater than 1. The number indicates a relative expression of “enrichment” of the society.
The indicator is preferable to use as an additional criterion to NPV and also if comparing more investment options among themselves.
Use of the PI in practice: In the enterprise it used by CFO in assessing the effectiveness of the investment. The criterion should be used complementary.
Related terms and methods:
- Accounting-Based Profitability Measures
- Cash Flow
- Financial Analysis
- Internal Rate of Return
- Investment Evaluation Techniques
- NPV - Net Present Value
- Payback Period
- Profit indicators
Related management field:
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