The Profitability Index (PI) is calculated by dividing the present value of future cash inflows by the initial investment. A PI greater than one indicates a profitable investment, with higher values reflecting more attractive opportunities.

Consider GreenTech Solutions, a renewable energy company evaluating two projects. Project X requires a $900,000 investment in a solar power plant, expected to generate cash flows with a present value of $1.2 million. Project Y, on the other hand, requires a $300,000 investment in wind turbines, with expected cash flows having a present value of $500,000. Using the PI formula, Project X has a PI of 1.33, while Project Y has a significantly higher PI of 1.67.

Given its limited capital, GreenTech Solutions might prioritize Project Y over Project X, as it offers a much higher return relative to its cost.

However, using the Profitability Index alongside other financial metrics such as Net Present Value (NPV) or Internal Rate of Return (IRR) would provide a more comprehensive evaluation of the projects' potential.

Из главы 7:

article

Now Playing

7.19 : Calculating Profitability Index

Capital Budgeting

41 Просмотры

article

7.1 : Introduction to Capital Budgeting

Capital Budgeting

156 Просмотры

article

7.2 : Basics of Investment Decision-making

Capital Budgeting

102 Просмотры

article

7.3 : Importance of Capital Budgeting

Capital Budgeting

72 Просмотры

article

7.4 : Advantages and Limitations of Capital Budgeting

Capital Budgeting

218 Просмотры

article

7.5 : Capital Budgeting Techniques

Capital Budgeting

118 Просмотры

article

7.6 : Payback

Capital Budgeting

70 Просмотры

article

7.7 : Payback Period

Capital Budgeting

37 Просмотры

article

7.8 : Discounted Payback Period

Capital Budgeting

53 Просмотры

article

7.9 : Net Present Value

Capital Budgeting

112 Просмотры

article

7.10 : Net Present Value Method

Capital Budgeting

123 Просмотры

article

7.11 : Decision-making Through Net Present Value

Capital Budgeting

41 Просмотры

article

7.12 : Internal Rate of Return

Capital Budgeting

27 Просмотры

article

7.13 : Calculating Internal Rate of Return

Capital Budgeting

27 Просмотры

article

7.14 : Decision-making Through Internal Rate of Return

Capital Budgeting

31 Просмотры

See More

JoVE Logo

Исследования

Образование

О JoVE

Авторские права © 2025 MyJoVE Corporation. Все права защищены