The profitability index rule of thumb. Introduction: Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows: Profitability index= ( NPV − Initial investment ) Initial investment If the profitability index is greater than 1, then NPV is positive. If the profitability index is less than 1, then NPV is negative. If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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Chapter 22.7, Problem 1CC

Summary Introduction

To discuss: The profitability index rule of thumb.

Introduction:

Profitability index is a payoff ratio of the investment on a planned project. It is utilized for ranking the projects. The relationship between the net present value (NPV) and the profitability index are as follows:

Profitability index=(NPV−Initial investment)Initial investment

If the profitability index is greater than 1, then NPV is positive.

If the profitability index is less than 1, then NPV is negative.

If a company has many positive NPV projects and is subjected to capital restrictions, then the profitability index might give a fair measure for ranking the projects.

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