Define the term Profitability Index? How can we consider the profitability index of a project?
The profitability index (PI), then again alluded to as the value investment ratio (VIR) or profit investment ratio (PIR), portrays a file mirroring the money-saving advantage connection of a proposed venture.
The profitability index is the ratio between the present value of cash inflow and the present value of cash outflow or initial investment.
Formula:
The profitability index of a project is considered as follows:
Case 1:
If the profitability index is greater than one, then the projects NPV is positive or the project's present value of cash inflows is higher than the initial investment. The firm should accept the project with the profitability index higher than 1.
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