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| | The author's title is Christy. For years she's been living in Kentucky but her spouse desires them to move. To play lacross is some thing I truly enjoy doing. Office supervising is what she does for a residing.<br><br>my website - [http://Formalarmour.com/index.php?do=/profile-26947/info/ psychics online] |
| {{Corporate finance}}
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| '''Profitability index''' (PI), also known as '''profit investment ratio''' (PIR) and '''value investment ratio''' (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. | |
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| The ratio is calculated as follows:
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| *<math>\text{Profitability index} = \frac{\text{PV of future cash flows}}{\text{Initial investment}}</math>
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| Assuming that the [[cash flow]] calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. Any value lower than one would indicate that the project's [[present value|PV]] is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
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| Rules for selection or rejection of a project:
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| *If PI > 1 then accept the project
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| *If PI < 1 then reject the project
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| For example, given:
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| ************************************
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| *Investment = $40,000
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| *Life of the Machine = 5 Years
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| [[cash flow|CFAT]] Year CFAT
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| 1 18000
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| 2 12000
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| 3 10000
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| 4 9000
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| 5 6000
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| Calculate [[Net present value]] at 10% and PI:
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| Year CFAT PV@10% PV
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| 1 18000 0.909 16362
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| 2 12000 0.827 9924
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| 3 10000 0.752 7520
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| 4 9000 0.683 6147
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| 5 6000 0.621 3726
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| Total present value 43679
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| (-) Investment 40000
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| NPV 3679
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| PI = 43679/40000 = 1.091 > 1 ⇒ Accept the project
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| ==References==
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| <references />
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| ==External links==
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| Use explained in the business book: Pursuing the Competitive Edge, Hayes, Pisano, Upton and Wheelwright. Wiley, 2005. pg. 264
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| [[Category:Financial terminology]]
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| {{economics-stub}}
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The author's title is Christy. For years she's been living in Kentucky but her spouse desires them to move. To play lacross is some thing I truly enjoy doing. Office supervising is what she does for a residing.
my website - psychics online