Profitability Index

Profitability Index

An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as:

Notes:

A ratio of 1.0 is logically the lowest acceptable measure on the index. Any value lower than 1.0 would indicate that the project's NPV is less then the initial investment. As values on the profitability index increase, so does the financial attractiveness of the proposed project.

See also: Benefit Cost Ratio, Cash Flow, Discounted Cash Flow, Future Value, NPV

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Profitability index

The present value of the future cash flows divided by the initial investment. Also called the benefit-cost ratio.