We accept that investment proposal whose NPV must be positive and we also accept that investment proposal whose P.I. NPV method and profitability index are deeply connected with each other and both give same result for evaluation of investment projects. As values on the profitability index increase, so does the financial attractiveness of the proposed project. Any value lower than 1.0 would indicate that the project's PV is less than the initial investment. A ratio of 1.0 is logically the lowest acceptable measure on the index. If profitability index is one or more, then project should be accepted. This decision can be taken by calculating profitability index. If there is only one project and we have to decide whether investment in this project is profitable or not.

will get lower rank and only highest rank project will be accepted for real investment. On the basis of profitability index, we can provide ranks to different investment projects. Profitability Index shows profitability, if we invest per unit of money. = Present Value of Cash inflows / Present Value of Cash outflows

After this profitability Index is calculated by dividing PV of cash inflows with PV of cash outflows. We use discount or minimum rate for calculating present value. In profitability Index, we also calculate the present value of cash outflows or investments for purchasing projects or assets and present value of cash inflows in the form of profit from investments. This is fresh method and if any body has learnt NPV of capital budgeting, then he can also understand profitability index. Profitability Index has made his identity as the technique of evaluation of investment projects in financial market.

Profitability index