Project Profitability Index

A profitability index of 1.

Project profitability index. The appropriate discount rate for. The profitability index is calculated by dividing the present value of future cash flows that will be generated by the project by the initial cost of the project. It only includes the inflows or future returns.

Firstly we can compute by adding up all the. Profitability index serves as a tool to classify projects. In itself it is a modification of the net present value NPV method.

Profitability index PI is a capital budgeting method to measure the projects ability to pay off the initial cash outlay. Profitability Index PI is the ratio of payoff to the investment of a proposed project and is represented as PI NPVInitial InvtInitial Invt or Profitability Index PI Net Present Value NPVInitial InvestmentInitial Investment. The profitability index definition is a tool for measuring profitability of a proposed corporate project by comparing the cash flows created by the project to the capital investments required for the project.

Profitability index is a modification of the net present value method of assessing an investments potential profitability. An organization plans to receive 100000 euros in three years on an investment of 85000 euros. This suggests that the business will move forward.

The initial costs include the cash flow required to get the team and project off the ground. The PV of future cash flows does not include the initial investment. Profitability index PV invested amount 1 NPV invested amount Using the previous example.

If the value of the index is bigger then the project would be more attractive. Download the Free. Firstly the initial investment in a project has to be assessed based on the project requirement in terms of.