## The profitability index is a ratio of quizlet

The profitability index is a capital budgeting technique that compares present value of future inflows with the initial outflow, in ratio terms. It is calculated by dividing the present value of cash flows by initial investment of a project. Accept projects with a profitability index greater than 1 and reject those with less than 1. In general, if NPV is positive, the profitability index would be greater than 1; if NPV is negative, the profitability index would be below 1. The profitability index differs from NPV in one important respect: since it is a ratio, it provides no indication of the size of the actual cash flows. The Profitability Index (PI) measures the ratio between the present value of future cash flows to the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment. The Profitability Index is also known as the Profit Investment Ratio (PIR) or the Value Investment Ratio (VIR). The profitability index (PI) refers to the ratio of discounted benefits over the discounted costs. It is an evaluation of the profitability of an investment and can be compared with the profitability of other similar investments which are under consideration. the profitability index is also referred to as benefit-cost ratio, cost-benefit ratio, or even capital rationing. The profitability index is the ratio of the company's net income (or profits) to the initial outlay or cost of a capital budgeting project. True False. View Answer. 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. What Does Profitability Index Mean? What is the definition of profitability index? This index computes the present value of the expected cash flows that the

## 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. Profitability Index Calculation. Example: a company invested $20,000 for a project and expected NPV of that project is $5,000.

The profitability index is the ratio of the company's net income (or profits) to the initial outlay or cost of a capital budgeting project. True False. View Answer. 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. What Does Profitability Index Mean? What is the definition of profitability index? This index computes the present value of the expected cash flows that the Profitability Index Technique The profitability index (PI) refers to the ratio of discounted benefits over the discounted costs (Damodaran, 2001). It is an evaluation of the profitability of an investment and can be compared with the profitability of other similar investments which are under consideration. A Profitability Index (PI), alternatively referred to as a profit investment ratio or a value investment ratio, is a method for discerning the relationship between the costs and benefits of investing in a possible project. It calculates the cost/benefit ratio of the present value (PV) of a project’s future cash flow over the price of the project’s initial investment.

### If the profitability index is over 1.0, then the profitability is positive, but if it is below 1.0 then the investment will probably fail. To put it another way, profitability index is constituted of the ratio between the present value of future cash flows and the initial investment. A profitability index measure of 1.0 is likely the lowest

The profitability index is the ratio of the company's net income (or profits) to the initial outlay or cost of a capital budgeting project. True False. View Answer. 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. What Does Profitability Index Mean? What is the definition of profitability index? This index computes the present value of the expected cash flows that the Profitability Index Technique The profitability index (PI) refers to the ratio of discounted benefits over the discounted costs (Damodaran, 2001). It is an evaluation of the profitability of an investment and can be compared with the profitability of other similar investments which are under consideration. A Profitability Index (PI), alternatively referred to as a profit investment ratio or a value investment ratio, is a method for discerning the relationship between the costs and benefits of investing in a possible project. It calculates the cost/benefit ratio of the present value (PV) of a project’s future cash flow over the price of the project’s initial investment. Advantages and Disadvantages of Profitability Index Profitability Index (PI) is a capital budgeting tool which helps to decide whether to accept or reject a project. The formula of PI is PI = Present values of inflows/ present values of outflows. Profitability Index (PI) is a capital budgeting technique to evaluate the investment projects for their viability or profitability. Discounted cash flow technique is used in arriving at the profitability index. It is also known as benefit-cost ratio. Calculation of profitability index is possible with a simple formula with inputs as – discount rate, cash inflows and outflows. PI greater than Profitability Index Calculation. Example: a company invested $20,000 for a project and expected NPV of that project is $5,000. Profitability Index = (20,000 + 5,000) / 20,000 = 1.25. That means a company should perform the investment project because profitability index is greater than 1. Profitability Index Example

### Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement. Examples are gross profit margin, operating profit margin Operating Margin Operating margin is equal to operating income divided by revenue. It is a profitability ratio measuring revenue after covering operating and non-operating expenses of a business.

What is the profitability index for a project with an initial cash outflow of #30 and subsequent cash inflows of $80 in year one and $20 in year two of the discount rate is 12%? 2.91 The PI rule for an independent project is to _____ the project if the PI is greater than 1. The profitability index is a technique used to measure a proposed project's costs and benefits by dividing the projected capital inflow by the investment. Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement. Examples are gross profit margin, operating profit margin Operating Margin Operating margin is equal to operating income divided by revenue. It is a profitability ratio measuring revenue after covering operating and non-operating expenses of a business. 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. Profitability Index Calculation. Example: a company invested $20,000 for a project and expected NPV of that project is $5,000.

## The profitability index is a technique used to measure a proposed project's costs and benefits by dividing the projected capital inflow by the investment.

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. What Does Profitability Index Mean? What is the definition of profitability index? This index computes the present value of the expected cash flows that the Profitability Index Technique The profitability index (PI) refers to the ratio of discounted benefits over the discounted costs (Damodaran, 2001). It is an evaluation of the profitability of an investment and can be compared with the profitability of other similar investments which are under consideration.

The profitability index is the ratio of the company's net income (or profits) to the initial outlay or cost of a capital budgeting project. True False. View Answer. 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. What Does Profitability Index Mean? What is the definition of profitability index? This index computes the present value of the expected cash flows that the Profitability Index Technique The profitability index (PI) refers to the ratio of discounted benefits over the discounted costs (Damodaran, 2001). It is an evaluation of the profitability of an investment and can be compared with the profitability of other similar investments which are under consideration. A Profitability Index (PI), alternatively referred to as a profit investment ratio or a value investment ratio, is a method for discerning the relationship between the costs and benefits of investing in a possible project. It calculates the cost/benefit ratio of the present value (PV) of a project’s future cash flow over the price of the project’s initial investment. Advantages and Disadvantages of Profitability Index Profitability Index (PI) is a capital budgeting tool which helps to decide whether to accept or reject a project. The formula of PI is PI = Present values of inflows/ present values of outflows. Profitability Index (PI) is a capital budgeting technique to evaluate the investment projects for their viability or profitability. Discounted cash flow technique is used in arriving at the profitability index. It is also known as benefit-cost ratio. Calculation of profitability index is possible with a simple formula with inputs as – discount rate, cash inflows and outflows. PI greater than Profitability Index Calculation. Example: a company invested $20,000 for a project and expected NPV of that project is $5,000. Profitability Index = (20,000 + 5,000) / 20,000 = 1.25. That means a company should perform the investment project because profitability index is greater than 1. Profitability Index Example