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What profitability index

What profitability index

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Answer #1

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.

Therefore:

  • If the PI is greater than 1, the project generates value and the company may want to proceed with the project.
  • If the PI is less than 1, the project destroys value and the company should not proceed with the project.
  • If the PI is equal to 1, the project breaks even and the company is indifferent between proceeding or not proceeding with the project.

The higher the profitability index, the more attractive the investment.

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