Example of Profitability Index. Company A is considering two projects: Project A requires an initial investment of 1, 500, 000 to yield estimated annual cash flows of: 150, 000 in Year 1. 300, 000 in Year 2. 500, 000 in Year 3. 200, 000 in Year 4. 600, 000 in Year 5.Definition: Profitability index, also known as profit investment ratio, is an investment tool that the financial professionals use to determine if an investment should be accepted or not based on the time value of money concept. profitability index example
Follow along with a simple example based on a small lemonade stand. Thus, the profitability index is 134. 20 100, or 1. 342. What the profitability index tells us When the profitability index is greater than 1, the project creates value it generates a return greater than our required return.
Profitability Index Example Texabonds Inc has decided to consider a project where they predict the annual cash flows to be 5, 000, 3, 000 and 4, 000, respectively for the next three years. At the beginning of the project, the initial investment put into the project is 10, 000. Calculating Profitability Index of a Project Posted in CFA Exam Level 1, Corporate Finance The profitability index, also known as the profit investment ratio, is calculated as the ratio of the present value of the future cash flows and the initial investment in the project.profitability index example Profitability Index Method. Profitability index serves as a tool to classify projects. If the value of the index is bigger, then the project would be more attractive. The acceptable measure of profitability index for a single project is 1. 0 or more. This suggests that the business will move forward.
What is the 'Profitability Index The profitability index is 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: A profitability index of 1. 0 is logically the lowest acceptable measure on the index, as any value lower than 1. 0 would indicate profitability index example Calculating Profitability Index Examples. The profitability index shows the potential benefit of an investment as a ratio. The index is calculated as the present value (PV) of future net cash flow divided by the first investment. Calculating the profitability index is important for investors to see the potential profitability of a project, As per the formula of profitability index, it can be seen that the project will create the additional value of 1. 003 for every 1 invested in the project. Therefore, the project is worth investing since the it is more than 1. 00. Profitability Index Excel Calculation Example# 2. Let us take the example of a company A which is considering two projects: Profitability Index Example# 1 N Enterprise has decided to invest in a project for which the initial investment would be 100 million. As they are considering whether its a good deal to invest into, they have found out that the present value of future cash flow of this project is 130 million. Profitability Index. For example, a project with an initial investment of 1 million and present value of future cash flows of 1. 2 million would have a profitability index of 1. 2. Based on the profitability index rule, the project would proceed. Essentially, the PI tells