Question

Define prfitability index. How it is calculated? Give an example

Answer 1

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↔Profitability index, also known as profit investment ratio and value investment ratio, 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. 



↔Profitability Index Method Formula. Use the following formula where PV = the present value of the future cash flows in question. Or = (NPV + Initial investment) ÷ Initial Investment: As one would expect, the NPV stands for the Net Present Value of the initial investment.

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