profitability index

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A method used in discounted cash flow for ranking a range of projects under consideration in which standard cash flow patterns are projected. It is based on the ratio:

total present values of cash inflows/initial investment,

the value of which is compared for each project.

The projects with a PI of less than 1 are not expected to earn the required rate of return and are rejected. The projects with a PI in excess of 1 are ranked according to the magnitude of the PI.

Subjects: Financial Institutions and Services — Accounting.

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