What is profitability index formula?
Profitability Index = (PV of future cash flows) ÷ Initial investment. Or = (NPV + Initial investment) ÷ Initial Investment: As one would expect, the NPV stands for the Net Present Value of the initial investment.
What does profitability index tell you?
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. A higher PI means that a project will be considered more attractive.
What is meant by profitability index?
The profitability index (PI) is a measure of a project’s or investment’s attractiveness. The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.
What is the relationship between NPV IRR and PI?
NPV calculates the present value of future cash flows. IRR ignores the present value of future cash flows. PB method also ignores the present value of future cash flows. The PI method calculates the present value of future cash flows.
How do you do discount in Excel?
=RATE (nper, pmt, pv, [fv], [type], [guess]) The Excel formula for calculating the discount rate—often used for calculating the interest rate for a loan or determining the rate of return required for hitting a particular investment objective.
Why is profitability index better than NPV?
The profitability index is an alternative of the net present value. Profitability Index would be bigger than 1.0 if the net present value appears positive. Otherwise, it would be negative. For an investor making one or a few property investments, NPV may provide a better insight by giving the total expected return.
Why is PI used for profit?
The PI is helpful in ranking various projects because it lets investors quantify the value created per each investment unit. The method divides the projected capital inflow by the projected capital outflow to determine the profitability of a project.