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Profitability Index (PI)
This is an index used to evaluate proposals for which net present values have been determined. The profitability index is determined by dividing the present value of each proposal by its initial investment.
The PI indicates the value you are receiving in exchange for one unit of currency invested.
- An index value greater than 1.0 is acceptable and the higher the number, the more financially attractive the proposal.
- A ratio of 1.0 is logically the lowest acceptable measure on the index. Any value lower than 1.0 would indicate that the project's PV is less than the initial investment.