ECONOMICS

Detailed explanation-1: -The profitability index (PI) is a measure of a project’s or investment’s attractiveness. The PI is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.

Detailed explanation-2: -The present value of an investment’s future cash flows divided by the initial cost of the investment is called the: Net present value.

Detailed explanation-3: -Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment.

Detailed explanation-4: -Profitability Index = (Net Present value + Initial investment) / Initial investment. Profitability Index = 1 + (Net Present value / Initial investment)

Detailed explanation-5: -Use the following formula where PV = the present value of the future cash flows in question. Or = (NPV + Initial investment) ÷ Initial Investment: As one would expect, the NPV stands for the Net Present Value of the initial investment.