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What is PI - Profitability Index
Profitability Index (PI) expresses the ratio of benefits to initial capital expenditures.

Profitability Index, usually the abbreviation PI is used. It expresses the ratio of benefits to initial capital expenditures.

Calculation:

Profitability Index calculation

where:

  • PI…. profitability index
  • I… initial capital expenditure
  • CFtcash 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.

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Last update: 20.05.2016

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