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Profitability index

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The profitability index (PI) is computed as

 $\ PI  = { \text {(PV of future cash flows)} \over \text {Initial investment}} $

 $\   = 1 + {\text {NPV} \over \text {Initial investment}} $

The profitability index serves as a mean to measure investments. If

PI > 1.0

  • invest,

PI < 1.0

  • do not invest.

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