Profitability Index

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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

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BREAKING DOWN '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.

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RELATED FAQS
  1. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
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    As businesses grow, they look for new opportunities to expand operations. Whether it is launching a new product or moving ... Read Full Answer >>
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    Companies assess their business practices and financial management from numerous angles in the quest to maximize profitability. ... Read Full Answer >>
  4. 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 >>
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