Calculate Investment Attractiveness with Profitability Index
The profitability index helps to determine the profitability of a project by comparing its present value of future cash flows to its initial cost.Formula
PI = PV (Future Cash Flows) / Initial InvestmentHow do I calculate the profitability index?
When calculating the profitability index of a project, it is important to consider the initial investment and the future cash flows. The profitability index (PI) can be calculated using the following formula:PI = PV (Future Cash Flows) / Initial Investment. The PV (Future Cash Flows) can be calculated using Sourcetable.
It is important to note that the profitability index is a measure of the return on investment. If the profitability index is greater than 1, then the project is deemed to be profitable. If the profitability index is less than 1, then the project is deemed to be unprofitable.
What is the profitability index rule?
The profitability index rule is a tool for decision-making. It measures the potential profit of the proposed project and is also known as the PI rule.
Key Points
How do I calculate profitability index?
PI = PV (Future Cash Flows) / Initial Investment
The Profitability Index Rule
The profitability index rule is a decision-making tool used to calculate the potential profit of a proposed project. This tool is also known as the PI rule.
Calculating Potential Profit
Using the profitability index, the potential profit of a proposed project can be calculated by taking the present value of the future cash flows and dividing it by the initial cost of the project.
Benefits of the PI Rule
The PI rule can provide insight into the potential profitability of a project, allowing decisions to be made with greater clarity. It also allows for comparison between different projects to determine which one is the most profitable.
