Definition of Profitability index:
The profitability index (PI), alternatively referred to as value investment ratio (VIR) or profit investment ratio (PIR), describes an index that represents the relationship between the costs and benefits of a proposed project. It is calculated as the ratio between the present value of future expected cash flows and the initial amount invested in the project. A higher PI, the more attractive a project will be.
Ratio of the present value of a projects cash flows to the initial investment. A profitability index number greater than 1 indicates an acceptable project, and is consistent with a net present value greater than 0.
The PI is helpful in ranking various projects because it lets investors quantify the value created per each investment unit. A profitability index of 1.0 is logically the lowest acceptable measure on the index, as any value lower than that number 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.
How to use Profitability index in a sentence?
- You must factor in everything when coming up with the profitability index for a new project that you think is high risk.
- The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.
- A PI greater than 1.0 is deemed as a good investment, with higher values corresponding to more attractive projects.
- I had to check the profitability index to determine a few things and it was really interesting to me, because I had never done it before.
- Many of our clients have portfolios with a high rate of investments enjoying profitability index es over 3.5, which is well above the standard and outperforms others in the industry.
- The profitability index (PI) is a measure of a project's or investment's attractiveness.
- Under capital constraints and mutually exclusive projects, only those with the highest PIs should be undertaken.
Meaning of Profitability index & Profitability index Definition