Profit power Index (PI)
Profit power index is explained as a evaluate of whether or not a proposed project will be profitable and complicated or simple based on the scope of the project in question. If the money anticipated to be bring forth from the project exceeds the costs needed to fund the project, then it will be a profitable investment. The profit power index is one of several methods employed to evaluate and quantify the attractiveness of a aimed investment.
Profit power Index Formula
The profit power index formula is most commonly computed as listed below. No simple profit power index calculator exists, so the profit power index equation will have to be computed manually.
Profit power Index = PV of Cash Inflows / PV of Cash Outflows
Profit power Index computation
The profit power index is computed by dividing the present value of the anticipated cash flows from a project by the present value of the project's capital investments. It is one of the more simple equations employed in the finance world. The computation yields a number, which is the profit power index.
If Profit power Index = 1 The projects benefits are anticipated to equal its costs.
If Profit power Index < 1 The projects costs are anticipated to exceed its benefits, reject the project.
If Profit power Index > 1 The projects benefits are anticipated to exceed its costs, accept the project.
If the profit power index is one, that means the project's cash outflows are anticipated to equal its cash inflows. If the profit power index is any number less than one, that means the project's cash outflows are anticipated to exceed the project's cash inflows. In other sense, it is a bad investment. In general speaking, a company would want to reject any project with a profit power index of less than one because investing in that project would be a money-losing venture.
If the profit power index is any number greater than one, that means the project's cash inflows are anticipated to exceed the project's cash outflows. Otherwise stated, it is a good investment. In general speaking, a company would want to accept any project with a profit power index greater than one because investing in that project would be a profitable venture. A more eminent number means a more attractive investment. For example, a project with a profit power index of 1.3 will be more attractive investment than a project with a profit power index of 1.2.
Advantages of Profit power Index
Profit power index advantages let in:
Evaluates all cash flows
Displays whether an investment increases firm value.
Evaluates multiple projects.
Compares time values of cash flows
Employs cost of capital as a comparison to projects
Profit power Index Disadvantages
Profit power index disadvantages comprise:
Doesn't work well with ratings in which only one project can happen at a time.
Cost of capital is needed to compute Profit power index.
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