{"id":105196,"date":"2021-02-01T11:07:40","date_gmt":"2021-02-01T05:37:40","guid":{"rendered":"https:\/\/www.vskills.in\/certification\/tutorial\/?page_id=105196"},"modified":"2024-04-12T14:28:28","modified_gmt":"2024-04-12T08:58:28","slug":"profitability-index-or-benefit-cost-ratio","status":"publish","type":"page","link":"https:\/\/www.vskills.in\/certification\/tutorial\/profitability-index-or-benefit-cost-ratio\/","title":{"rendered":"Profitability Index or Benefit-cost Ratio"},"content":{"rendered":"\n<p>It is the ratio of the present value of cash inflows at the required rate of return, to the initial cash outflow of the investment. It may be gross or net, net being simply gross minus one. The formula to calculate benefit-cost ratio or profitability index is as under: &#8211;<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" src=\"http:\/\/www.vskills.in\/lms\/wp-content\/uploads\/2016\/06\/Image-86-1.jpg\" alt=\"Image 86\" class=\"wp-image-40377\"\/><\/figure><\/div>\n\n\n\n<p><strong>Acceptance Rule<\/strong><\/p>\n\n\n\n<p>The following are the Profitability Index (PI) rules:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Accept PI &gt;&nbsp; 1<\/li><li>Reject PI &nbsp;&lt;&nbsp; 1<\/li><li>May accept PI =&nbsp; 1<\/li><\/ul>\n\n\n\n<p>When PI is greater than on, then the project will have positive NPV. The project with positive net present value will have profitability index greater than one. Profitability index less than one means that the project\u2019s net present value is negative<\/p>\n\n\n\n<p><strong>Evaluation of PI Method<\/strong><\/p>\n\n\n\n<p>Like NPV and IRR rules, PI is a conceptually sound method of appraising investment projects. It gives due consideration to the time value of money. It is a variation of the NPV method and requires the same computation as the NPV method. In PI method, since the present value of cash flows is divided by the initial cash outflow, it is a relative measure of a project\u2019s profitability.<\/p>\n\n\n\n<p>PI is a variation of the net present value (NPV) method, and requires the same computations as the net present value (NPV) method.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Time value. It recognizes the time value of money.<\/li><li>Value maximization. It is consistent with the shareholder value maximization principle. A project with profitability index greater than one will have positive net present value (NPV) and if accepted, it will increase shareholders wealth.<\/li><li>Relative profitability. In the profitability index (PI) method, since the present value of cash inflows is divided by the initial cash outflow, it is a relative measure of a project\u2019s profitability.<\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>It is the ratio of the present value of cash inflows at the required rate of return, to the initial cash outflow of the investment. It may be gross or net, net being simply gross minus one. The formula to calculate benefit-cost ratio or profitability index is as under: &#8211; Acceptance Rule The following are&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-105196","page","type-page","status-publish","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Profitability Index or Benefit-cost Ratio - Tutorial<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.vskills.in\/certification\/tutorial\/profitability-index-or-benefit-cost-ratio\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Profitability Index or Benefit-cost Ratio - Tutorial\" \/>\n<meta property=\"og:description\" content=\"It is the ratio of the present value of cash inflows at the required rate of return, to the initial cash outflow of the investment. 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