Profitability Index (PI)
The profitability index or benefit/cost ratio is the ratio of the present value of the future free cashflows to the initial
outlay. It provides a measure of an investment proposal’s desirability –
that is, the ratio of the present value of its future benefits to its initial cost. It also a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment.Profitability index is a useful tool for companies to rank the possible investment projects but since companies usually have limited financial resources, they only invest the most profitable projects. If there are a number of possible investment projects available, the company can use the profitability index to rank those projects from the highest profitability index to the lowest to decide in which to invest. If profitability index is one or more, then project should be accepted but if profitability index is lower than1.0, they will have to think of other investment opportunities