The presentation discusses the profitability index (PI), which is a capital budgeting technique used to evaluate investment projects based on their profitability. The PI is calculated as the discounted cash inflows divided by the initial cash outflow. A PI greater than or equal to 1 indicates the project is profitable. The presentation provides an example calculation of the PI for a project with an initial investment of $200,000 and cash flows of $40,000, $30,000, $50,000 and $20,000 over 4 years with a 10% discount rate, resulting in a PI of 1.1235.

1. Presentation on:
Presented by:
Prashant Ranka
Profitability Index
Date:17/10/2012

2. Profitability Index
 Profitability
Index (PI) is a capital budgeting
technique to evaluate the investment projects for their
profitability. Discounted cash flow technique is used
in arriving at the profitability index. It is also known as
benefit-cost ratio. Calculation of profitability index is
possible with a simple formula with inputs as –
discount rate, cash inflows and outflows. PI greater
than or equal to 1 is interpreted as good and is
acceptable.

3. Definition of PI
 Profitability Index is a ratio of discounted cash inflow
to the discounted cash outflow. Discounted cash
inflow is our benefit in the project and the initial
investment is our cost, which is why we also call it
benefit to cost ratio

4. How to calculate the Profitability Index ?
 The calculation of PI is easily possible once we have
the cash inflows and outflows with appropriate
discount rate are in place.
PI = Present Value of Future Cash Flows
Initial Investment Required

5. Example :
Cash outflow= 2,00,000
Cash flows: 40,000 , 30,000 , 50,000 & 20,000 through year 1,2,3&4 @
discount rate of 10%
Sol:
PI = 40000(PV1, .10)+30000(PV2, .10)+50000(PV3, .10)+20000(PV4, .10)
200000
PI = 40000(.909)+30000(.826)+50000(.751)+20000(.683)
200000
PI= 36360+24780+37550+13660
200000
PI = 1.1235
i.e., Project should be accepted

6. Thank You
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