Profitability index - Wikipedia Profitability index This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. ( February 2007 ) Corporate finance Working capital Cash conversion cycle Return on capital Economic value added Just - in - time Economic order quantity Discounts and allowances Factoring Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business plan Corporate action Societal components Financial law Financial market Financial market participants Corporate finance Personal finance Peer - to - peer lending Public finance Banks and banking Financial regulation Clawback Profitability index ( PI ), also known as profit investment ratio ( PIR ) and value investment ratio ( VIR ), 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. The ratio is calculated as follows : Profitability index = PV of future cash flows Initial investment ( displaystyle ( \text ( Profitability index ) ) = ( \frac ( \text ( PV of future cash flows ) ) ( \text ( Initial investment ) ) ) ) Assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. Any value lower than one would indicate that the project 's present value ( PV ) is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project. Rules for selection or rejection of a project : If PI > 1 then accept the project If PI < 1 then reject the project For example : Investment = $40,000 Life of the Machine = 5 Years CFAT Year CFAT 1 18000 2 12000 3 10000 4 9000 5 6000 Calculate Net present value at 10 % and PI : 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 43679 ( - ) Investment 40000 NPV 3679 PI = 43679 / 40000 = 1.091 > 1 ⇒ Accept the project References External links Use explained in the business book : Pursuing the Competitive Edge, Hayes, Pisano, Upton and Wheelwright. Wiley, 2005. pg. 264 This economics - related article is a stub. You can help Wikipedia by expanding it. Retrieved from `` https://en.wikipedia.org/w/index.php?title=Profitability_index&oldid=763804187 '' Categories : Profit Capital budgeting Economics and finance stubs Hidden categories : Articles needing additional references from February 2007 All articles needing additional references All stub articles Talk About Wikipedia فارسی Français Polski Русский Українська Edit links This page was last edited on 5 February 2017, at 09 : 19 ( UTC ). About Wikipedia

Question: the profitability index of an investment project is the ratio of the
Answer: payoff to investment