What is the profitability index?
The number of dollars received for every dollar invested, with all calculations performed in present value dollars. It is useful to rank investments that differ in initial cost; It compares alternative investments
Profitability Index (PI) is a financial metric used to measure the potential profitability of an investment by determining the ratio between the present value of cash inflows and the present value of cash outflows of the investment. It is also known as the profit investment ratio (PIR) or the value investment ratio (VIR).
In other words, the profitability index is a tool that investors can use to evaluate whether an investment or a project is worth pursuing. It helps to calculate the total value an investment will produce relative to the initial investment amount. The ratio obtained by dividing the present value of expected cash inflows by the present value of the initial cash outlay gives the profitability index.
A profitability index of greater than 1 indicates that the investment can generate a positive return. If the index value is less than one, it is typically not considered profitable, and the investment should be rejected. In general, the higher the PI ratio, the more desirable the investment or project is.
In summary, the profitability index can help investors or managers determine which investment opportunities will generate the highest returns and the highest value for a business or organization.
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