![]() At least from a financial perspective, a score greater than 1.0 indicates that an investment should be made. If the outcome of the ratio is greater than 1.0, this means that the present value of future cash flows to be derived from the project is greater than the amount of the initial investment. Present value of future cash flows รท Initial investment = Profitability Index The formula for the profitability index is as follows: The only difference is that it results in a ratio, rather than a specific number of dollars of net present value. The profitability index is a variation on the net present value concept. ![]() In situations where the amount of cash available is limited, the profitability index can be used to rank a set of proposed investments, where funds are assigned to the highest-ranking proposals and the rest remain unfunded. A higher profitability index increases the attractiveness of a prospective investment. It does so by comparing the initial investment amount to the present value of the future cash flows associated with that project. The profitability index measures the acceptability of a proposed capital investment.
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