What is the profitability index, and of what value is it?

What is the profitability index, and of what value is it?

Expert Solution

Answer:

What is the profitability Index:

The profitability index is a discounted cash flow technique of evaluating the various proposal for capital expenditure in which different cash flow is involved.

The profitability index is also known as the desirability index or present value index method.

Profitability index is calculated as follows:

Profitability Index = Present value of Cash Inflow / Present Value of Cash outflow

The decision of different projects can be taken as follows:

If, Profitability Index < 1	Reject the project
If, Profitability Index >= 1	Accept the project

Value of Profitability Index in the evaluation of the different proposals.

1. The profitability index considered the time value of money & better project evaluation technique.

2. The profitability index is a relative measure of a project's profitability since the Present value of cash inflow is divided by the present value of cash outflow.

ekkarill92 answered 2 years ago

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