Dictionary of Accounting Terms: profitability index
profitability index
ratio of the total present value (PV) of future cash inflows to the initial investment (I). That is, PV/I. This index is primarily used as a means of ranking projects in descending order of attractiveness. In a single project case, if the index is greater than 1, the project should be accepted. For example, consider the following data:
The profitability index is 1.31 (PV/I = $16,950/$12,950). Note PV = $3000 ¥ PV of an annuity of $1 for 10 years and 12% = $3000 ¥ 5.65 = $16,950. Since this project generates $1.31 for each dollar invested (or its index is greater than 1), it should be accepted.
