What is the profitability index?

profitability index (PI), alternatively referred to as the ratio of investment in profit or value investment ratio, is the method for the relationship between the costs and the benefits of investing in a possible project. It calculates the cost of the cost/benefits of the current value (PV) of the future project flow at the cost of the initial investment of the project. This formula is commonly written as PI = PV of future cash flows ÷ initial investment. The image that provides this formula helps investors to decide whether the project is attractive enough to follow. The value of less than 1 suggests that the possible value of the project is lower than the initial investment. This means that the investor does not earn profit and should not invest in the project. The value exceeding 1 indicates financial profit and as the number rises, the Becoms investment is more attractive. Any project below one is completely excluded from the list; It is considered to be with one or higher rating. The profitability index is considered to be useful for this task becauseIt allows measuring and comparing two or more separate projects, each of which requires completely different amounts of investment.

The profitability index number provides projects returned to each invested dollar. Therefore, if the profitability index brings 1.5, the investor may expect to receive a return on $ 1.50 in USD (USD) for each invested dollar. Alternatively, the profitability index provides 0.9, the investor can expect to recover $ 0.90 for each dollar spent, resulting in negative returns.

Profitabiindex Lita is related to another common financial formula called the pure current value (NPV) indicator. These two formulas are often confused because they are used for a similar purpose. Although the profitability index measures the relative investment value, the pure current value indicator measures the absolute value of the investment.

profitability index is considered somewhat limited because we wouldHe ordered us to accept all investments over 1. However, it assumes that investors do not have to add their capital and therefore invest as much as possible. However, if capital is rare, the investor must consider the size of the investment itself, because investing large amounts of capital in one project involves a large amount of risk.