What is Profitability Index?
This is a financial tool which shows whether a business project is worthwhile by calculating the relationship between its cost and benefits. You can calculate it by dividing the present value of the project’s expected cash flows by the present value of the capital investments.
Where have you heard of Profitability Index?
It’s a popular calculation used to evaluate investments, and is sometimes also known as cost-benefit ratio, benefit-cost ratio, or capital rationing. One of the reasons for its popularity is that it can be used to evaluate multiple projects at the same time.
What you need to know about Profitability Index....
It’s designed to help you work out whether or not a project will be profitable. If the amount of money you expect to generate from the project is higher than the costs needed to fund it, then it will be a profitable investment. A value of 1 is the lowest acceptable value on a profitability index, because any value lower than this would mean the project’s value is lower than the initial investment required.
Find out more about Profitability Index….
When you're looking at Profitability Index, it helps to understand profit margins. Find out more with our guide.