Profitability Index

AAA

DEFINITION of 'Profitability Index'

An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as:

Profitability Index

INVESTOPEDIA EXPLAINS 'Profitability Index'

A ratio of 1.0 is logically the lowest acceptable measure on the index. Any value lower than 1.0 would indicate that the project's PV is less than the initial investment. As values on the profitability index increase, so does the financial attractiveness of the proposed project.

RELATED TERMS
  1. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  2. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  3. Benefit Cost Ratio - BCR

    A ratio attempting to identify the relationship between the cost ...
  4. Future Value - FV

    The value of an asset or cash at a specified date in the future ...
  5. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
  6. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
RELATED FAQS
  1. 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 >>
  2. What is the relationship between marginal return and profitability?

    Companies assess their business practices and financial management from numerous angles in the quest to maximize profitability. ... Read Full Answer >>
  3. 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 >>
Related Articles
  1. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  2. Investing

    What Lies Ahead for Apple's P/E ratio

    Recently, Apple's P/E multiple has come down to levels equal to the S&P 500. What does the future hold for the tech giant's P/E ratio?
  3. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  4. 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.
  5. 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.
  6. 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.
  7. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  8. 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.
  9. 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.
  10. Investing

    Can You Bank on BofA in 2015 (and Beyond)?

    An in-depth look at BofA, one of the most widely-traded stocks on Wall Street.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center