Profitability index

1. Amity Global Business School Presentation on: Profitability Index Presented by: Date:17/10/2012 Prashant Ranka

2. Profitability Index Profitability Index (PI) is a capital budgeting technique to evaluate the investment projects for their 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 or equal to 1 is interpreted as good and is acceptable.

3. Definition of PI Profitability Index is a ratio of discounted cash inflow to the discounted cash outflow. Discounted cash inflow is our benefit in the project and the initial investment is our cost, which is why we also call it benefit to cost ratio

4. How to calculate the Profitability Index ? The calculation of PI is easily possible once we have the cash inflows and outflows with appropriate discount rate are in place .   PI = Present Value of Future Cash Flows Initial Investment Required

5. Example : Cash outflow= 2,00,000 Cash flows: 40,000 , 30,000 , 50,000 & 20,000 through year 1,2,3&4 @ discount rate of 10% Sol: PI = 40000(PV1, .10)+30000(PV2, .10)+50000(PV3, .10)+20000(PV4, .10) 200000 PI = 40000(.909)+30000(.826)+50000(.751)+20000(.683) 200000 PI= 36360+24780+37550+13660 200000 PI = 1.1235 i.e., P roject should be accepted

6. Thank You 