Profitability Index Rule

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Dictionary Says

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 Says

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.
Search results for

'Profitability Index Rule'

  • An Introduction To Corporate Valuation Methods

    http://www.investopedia.com/articles/financial-theory/11/corporate-project-valuation-methods.asp
    ... The NPV rule states that all projects which have a positive net present ... not factor
    in the overall magnitude of the project, the profitability index (PI), a ...

  • CFA Level 1 Study Guide - Financial Ratios - Operating ...

    http://www.investopedia.com/exam-guide/cfa-level-1/financial-ratios/operating-profitability-ratios.asp
    ... 4.11 The Consumer Price Index & Inflation; ... Production Possibility Curves; 5.3 Trade
    Efficiency Rule; ... Internal Liquidity Ratios; 7.3 Operating Profitability Ratios ...

  • CFA Level 1 Study Guide - Global Economic Analysis - Trade ...

    http://www.investopedia.com/exam-guide/cfa-level-1/global-economic-analysis/trade-efficiency.asp
    ... 4.11 The Consumer Price Index & Inflation; ... Production Possibility Curves; 5.3 Trade
    Efficiency Rule; ... Internal Liquidity Ratios; 7.3 Operating Profitability Ratios ...

  • CFA Level 1 Study Guide - Macroeconomics - The Consumer Price ...

    http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/consumer-price-index.asp
    ... 4.11 The Consumer Price Index & Inflation; ... Production Possibility Curves; 5.3 Trade
    Efficiency Rule; ... Internal Liquidity Ratios; 7.3 Operating Profitability Ratios ...

  • CFA Level 1 Study Guide - Equity Investments - The Concentration ...

    http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/concentration-ratio-herfindahl-index.asp
    ... 4.11 The Consumer Price Index & Inflation; ... Production Possibility Curves; 5.3 Trade
    Efficiency Rule; ... Internal Liquidity Ratios; 7.3 Operating Profitability Ratios ...

  • Financial Forecasting: The Bayesian Method

    http://www.investopedia.com/articles/financial-theory/09/bayesian-methods-financial-modeling.asp
    ... This particular rule is most often used to calculate ... 1150 instances showed the stock
    index decreased ... affect the value of particular profitability and efficiency ...

  • CFA Level 1 Study Guide - Securities Markets - Characteristics of ...

    http://www.investopedia.com/exam-guide/cfa-level-1/securities-markets/security-index-characteristics.asp
    ... 4.11 The Consumer Price Index & Inflation; ... Production Possibility Curves; 5.3 Trade
    Efficiency Rule; ... Internal Liquidity Ratios; 7.3 Operating Profitability Ratios ...

  • Taking Advantage Of Volatility Spikes With Credit Spreads

    http://www.investopedia.com/articles/optioninvestor/10/volatility-spikes-credit-spreads.asp
    ... of course, it is a reasonable rule of thumb. ... as measured objectively using the VIX
    index – served two ... to maximize his/her potential profitability by taking ...

  • Series 7 Study Guide - Portfolio Management - Ratio Analysis ...

    http://www.investopedia.com/exam-guide/series-7/portfolio-management/ratio-analysis.asp
    ... 8.15 Index Options; 8.16 Other Options; 8.17 Tax ... of a Short Position; 10.17 Plus
    Tick Rule; 10.18 Costs ... Efficient use of assets; Profitability; Asset coverage and ...

  • A Checklist For Successful Medical Technology Investment

    http://www.investopedia.com/articles/stocks/08/medical-tech-investment.asp
    ... In those cases, try this rule of thumb - if a ... For more on measuring profitability,
    read Spotting Profitability With ROCE ... the Standard & Poor's 500 Index (S&P 500 ...

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