Breaking Down the Profitability Index: Components Explained for Beginners
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In projecting the profitability index, it is necessary to know the components of the profitability index explained with examples  when determining the capital budget.  The profitability index (PI) is a measure on the relative profitability of a project which is a ratio of future cash inflows to the initial investment (present value).  The present value of cash inflows and the initial cost of the project are the two main elements.  Through these aspects, people in the field of finance would be able to know whether an investment will add value to the shareholders. As an example, assume a company has invested in a new line of products at the cost of 500,000.  Assuming that the discounted future cash inflows are estimated to be of $650,000, the profitability index would be 1.3.  This is an indication that the company will make a profit of 1.30 out of every one dollar it will invest.  The de-composition of the elements of profitability index with illustrative examples assists managers not o...
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