Profitability Index

1. The profitability index is used to rank qualifying investments. The index is the present value of the future cash flows divided by a project's or an investment's initial cost (or the present value of the cash outflows if the investment is not all at time 0). Mathematically, for independent investments, if the net present value of a project or an investment is greater than zero, its internal rate of return will be greater than the hurdle rate of return and the profitability index will be greater than 1.0. A measure used in capital budgeting to rank projects, calculated as the present value of the future cash flows from an investment divided by the initial investment. (Also called the benefit-cost ratio.)