Profitability index shows how this or that project to be profitable (relative), or how much cash will come in the course of this project.This takes into account only one unit of investment.
Investments and profitability index
Before you invest your money in this or that project, it is necessary to try to determine which of the options will bring greater profits and how well you benefit at the same time receive.It is in order to learn this information, and there is a so-called index of return on investment.This indicator is also known as the profitability index, or PI.
What you need to know about the index of profitability of the investment
It can be used without any problems to calculate a ratio between current revenues and current expenditures there.This is also taken into account the money that has been invested in the project.In addition, the calculation is as real (in this case are calculated the funds that have been received over the past period of time) and predictive (when account is taken of income and expenses, which will still be the case).
If the calculations turned out that PI is less than 1, then it can be argued that you have received from the investment in the project net income, which is less than the funds that were invested in it.It gives the right to assert that such investment of money was unprofitable.
If the index return on investment is equal to 1, then the project can be both cost-effective or not.But the PI, which is greater than one means that you have invested your money wisely and get a large enough income.It should be remembered that the higher the value obtained, the more stable and reliable considered a project.Also remember that in the calculation of long-term projects is often the case that the initial gains could not be more capital, so consider the time period.
Advantages and disadvantages of index
Profitability index has its pros and cons.Among the advantages of this method is the most important thing is that it allows the perfect time to distribute the funds.In addition, it can be used to determine what effects had a particular project for the time of its existence, as well as to compare different scale projects.
But he has some disadvantages.For example, the profitability index does not rank the projects without any problems, which vary in duration.But in spite of all the disadvantages, namely via PI it is easy enough to assess the effectiveness of long-term investments and to be able to calculate profit.
index formula profitability
If we talk about how to calculate PI, here you need a special formula that looks like this:
PI = PVin / PVout
or so
PI = 1 + NPV / PVout
In these formulas PVin (NPV) is the net present value of the project and PVout - this investment.
Profitability index, a formula which has been described above, does not mean that you necessarily get the absolute size of the net flow of money, because it refers only to the expenses related to the investment.
If you are an investor and you want to determine how best to a particular project, then you must know that the more the investment costs, the greater will be the sum of the net cash flow that you are going to get.Also worth will influence the amount of so-called investment costs for different time periods.It has an important influence on the amount of the flow of money and then, when the operational stage.The discount rate has a significant impact on the cost of the main indicators of the project in the field of investment.
