Profitability Index is a capital budgeting tool used to compare different projects based on the net present value added by each project per $1 of initial investment.
The Profitability Index (PI) measures the ratio between the present value of future cash flows and the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment. The Profitability Index is also known as the Profit Investmen...
Profitability Index (PI) is a capital budgeting technique to evaluate investment projects’ viability or profitability.Discounted cash flow techniqueis used in arriving at the profitability index. It is also known as a benefit-cost ratio. Calculation of PI is possible with a simple formula with inp...
Cash Payback Technique: Definition & Formula 3:32 Evaluating a Budget Using the Net Present Value Method 3:50 Intangible Benefits | Definition, Characteristics & Examples 4:19 Profitability Index Method: Definition & Calculations 4:27 3:31 Next Lesson How to Evaluate a Budget Using the ...
The profitability index (PI) refers to the ratio of discounted benefits over the discounted costs. It is an evaluation of the profitability of an investment and can be compared with the profitability of other similar...
Guide to Profitability & its meaning. We explain its differences with revenue, along with formula, example, advantages & disadvantages.
Example 2: How to calculate PI when the PV of future cash flows is not given Benefits and Limitations of Profitability Index Profitability index calculator helps youdecide the potential profitability or viability of an investment or project. Every day, you are faced with decisions on how best to...
The formula for calculating the Profitability Index is as follows: Profitability Index = Present Value of Future Cash Inflows / Initial Investment For example, let’s say a business is considering an investment project with a present value of future cash inflows of $500,000 and an initial invest...
To calculate the profitability index for the new factory project, the present value of the future cash flows is calculated using the same formula: PV = $300,000 / (1 + 0.10)^1 + $300,000 / (1 + 0.10)^2 + ... + $300,000 / (1 + 0.10)^5 ...
Example of Profitability Ratios with Calculation Suppose Ayur & Co. makes a net profit of Rs 1,00,000, and the gross profit is Rs 1,50,000. Net sales in the year amount to Rs 5,00,000, interest Rs 10,000 and taxes Rs 20,000. The company has 10,00,000 invested in the assets,...