Capital Market Question:
Explain Profitability Index (PI) /Benefit Cost Ratio (B/C Ratio)?
Answer:
Profitability index (PI) is also known as profit investment ratio (PIR) and also termed as value investment ratio(VIR) which tells that a proposed project will have the ratio of payoff to investment. It is like a tool which is used for ranking projects and it allows quantifying the amount of value created per unit of investment. If the value of profitability index is less than 1 then accept the project and if it is greater than one then reject the project. Another way to calculate the profitability index is future cash flows divided by the initial investment.
| Previous Question | Next Question |
| What are the steps taken for proper control on capital budgeting process? | Do you know Internal rate of return? |