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581:), 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. Under capital rationing, PI method is suitable because PI method indicates relative figure i.e. ratio instead of absolute figure.
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Year CFAT PV@10% PV 1 18000 0.909 16362 2 12000 0.827 9924 3 10000 0.752 7520 4 9000 0.683 6147 5 6000 0.621 3726 Total present value
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calculated does not include the investment made in the project, a profitability index of 1 indicates break-even. Any value lower than one would indicate that the project's present value (
634:{\displaystyle {\text{Profitability index}}={\frac {\text{PV of future cash flows}}{\text{Initial investment}}}=1+{\frac {\text{NPV}}{\text{Initial investment}}}}
652:) is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project.
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43679 (-) Investment 40000 NPV 3679 PI = 43679/40000 = 1.092 > 1 ⇒ Accept the project
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Use explained in the business book: Pursuing the
Competitive Edge, Hayes, Pisano, Upton and Wheelwright. Wiley, 2005. pg. 264
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Year CFAT 1 18000 2 12000 3 10000 4 9000 5 6000
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We assume an investment opportunity with the following characteristics:
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41:Please help
36:verification
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449:Toxic asset
419:Super angel
414:Speculation
379:Market risk
246:engineering
791:Categories
715:References
688:Calculate
661:discounted
276:Investment
231:accounting
208:Accounting
69:newspapers
744:economics
646:cash flow
226:Financial
700:See also
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160:Clawback
667:Example
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797:Profit
573:) and
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389:Option
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624:NPV
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650:PV
563:PI
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