DEFINITION of 'Profitability Index Rule'
A regulation for evaluating whether to proceed with a project or investment. The profitability index rule states: If the profitability index or ratio is greater than 1, the project is profitable and may receive the green signal to proceed. Conversely, if the profitability ratio or index is below, the optimum course of action may be to reject or abandon the project.
INVESTOPEDIA EXPLAINS 'Profitability Index Rule'
The profitability index rule is a variation of the net present value (NPV) rule. 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; Being a ratio, it ignores the scale of investment and provides no indication of the size of the actual cash flows.
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.

Net Present Value  NPV
The difference between the present value of cash inflows and ... 
Profitability Index
An index that attempts to identify the relationship between the ... 
Benefit Cost Ratio  BCR
A ratio attempting to identify the relationship between the cost ... 
Cash Flow
1. A revenue or expense stream that changes a cash account over ... 
Capital Budgeting
The process in which a business determines whether projects such ... 
Investment Income Ratio
The ratio of an insurance company’s net investment income to ...

How do you use the profitability index rule when scoping out a project?
As businesses grow, they look for new opportunities to expand operations. Whether it is launching a new product or moving ... Read Full Answer >> 
What are the disadvantages of using net present value as an investment criterion?
While net present value (NPV) calculations are useful when you are valuing investment opportunities, the process is by no ... Read Full Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >>

Investing
Using DCF In Biotech Valuation
Valuing firms in this sector can seem like a black art, but there is a systematic way to pin a price on potential. 
Forex Education
Time Value Of Money: Determining Your Future Worth
Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation. 
Fundamental Analysis
Internal Rate Of Return: An Inside Look
Use this method to choose which project or investment is right for you. 
Economics
What is Value Added?
Value added is used to describe instances where a firm takes a product and adds a feature that gives customers a greater sense of value. 
Economics
Understanding Specialization
Specialization is when a person, business, or region focuses their productive efforts on a smaller subset of a larger system for a competitive advantage. 
Economics
What is the Breakeven Point?
In general, when gains or revenue earned equals the money spent to earn the gains or revenue, you’ve hit the breakeven point. 
Fundamental Analysis
What is a Null Hypothesis?
In statistics, a null hypothesis is assumed true until proven otherwise. 
Economics
Bulk Shipping Companies Struggle As Markets Soften
The "soft" dry bulk shipping market that confronts shipping companies is a result of lower demand from China, and an excessive amount of bulk ships. 
Economics
Effects of OIS Discounting for Derivative Traders
The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss. 
Investing
Can You Bank on BofA in 2015 (and Beyond)?
An indepth look at BofA, one of the most widelytraded stocks on Wall Street.