Profitability Index (PI)

Profitability Index (PI) for Mutually Exclusive  Project Mutually exclusive project is different from independent project. For mutually exclusive project, we can accept project A or B or deny both, but we cannot accept both projects. We may solve mutually exclusive projects using PI with following way: Compute incremental PI solved via cash flows from project A minus project B, If

PROFITABILITY INDEX (PI) FOR INDEPENDENT PROJECT Company may have some projects to make decision invest or not.  The independent project is one whose acceptance or rejection is independent of the acceptance or rejection of the other projects. PI = PV/I PV: sum of present value of cash flows subsequent to initial cash flow I: initial cash flow Accept/Reject Decision: if

PROFITABILITY INDEX (PI) Profitability index (PI) is the present value of an investment’s future cash flows divided by its initial cost. Also, it is benefit-cost ratio. PI = PV/I PV: sum of present value of cash flows subsequent to initial cash flow I: initial cash flow Accept/Reject Decision: if PI>1=> accept the project if PI<1=> reject the project Advantages of